Don't Let This Happen To You

Don’t let this happen to you -

You are now very young. Perhaps you just finished high school and are heading off to college in the fall. You could be starting a new career soon or already established in the work force. And, you have a few decades before you retire. Retirement is the last think you thought you had to save for at this age. There are so many other important life style choices you would rather put away money for. Who could blame you for not thinking about retirement before buying a house, having children and buying that new car you had your eyes on for months.

Well here’s the thing. When I started working in 1975 – yes, I’m a boomer – my employer had a traditional pension plan. I stayed with that company for 7 years, which was not enough time to earn any pension benefits. My next and last employer also had a pension plan that was terminated after I was there 6 years. I was fortunate to earn a small benefit that may enough to cover my food bills for a week when I am 65.

After this employer discontinued offering pension benefits, they implemented a 401k plan as the replacement. We were told this was the miracle plan because it would give us so much control over how much to invest and what to invest in. Plus, if you were lucky, there was a small company match that went along with it.

The 401k plan did not reach mainstream corporate America until the early 1990s. Now less than 20% of all corporations offer the traditional pension benefit and 401k is now the primary vehicle for funding retirement. This was the first step in establishing what President Bush (#43) called the “ownership society”

So, what is my point?

From the time I was a young employee in 1975 until the beginning of mid career in 1988, I didn’t know I had to save anything on my own for retirement. Fortunately, I put away the most the law allowed in the 401k account thinking that my contributions would be enough to provide me with retirement income comparable to what I was earning.

As it was for most of us in my age group, we didn’t now that a 401k account alone would not be enough to finance a multi million dollar retirement. And unless one knew how to calculate the amount of assets needed 30 to 40 years into the future, taking into account inflation and making certain assumptions about investment returns, there was a high probability of under funding retirement. The consequences of this will start to materialize in the next few years as the first of our group thinks about retiring and realizes they can’t because they don’t have enough money. My generation will need to work longer, if we can, or more likely, scale back our standard of living in retirement.

This is not a finger pointing issue. There is no need to blame anyone for this predicament the boomers are facing. But, it is a wake up call for late boomers and cohorts in the X and Y generations.
There is a lesson for the younger people from our generation’s experience with self funding retirement. The lesson is about the value of compounding – how money grows; it is the gift of time and the curse of time.

In my case, and I am sure the same with many others my age, we were deprived of a 10-15 year compounding term from 1975-1990 that could have made a very substantial difference on the amount of assets we could have had at age 65. The loss of this time is non recoverable – the impact will last as long as we live.

So those who are just starting out earning a good living don’t let your quality of life after you retire be compromised because you did not take the full advantage of having your assets grow over the next 30 to 40 years. You’d be amazed how much money grows over time; $1,000 today becomes almost $15,000 in 40 years at 7% - this is the gift of time.

Now see wait happens if you wait only 3 years to make this deposit – the future value is $12,200 or 20% less. To reach $15,000 you would need to deposit $1,227 or earn 7.60% on a $1,000 deposit instead – this is the curse of time.

Take my advice and get some advice – don’t let 10 or 15 years of good quality compounding time slip away without knowing the consequences like what happened with our generation.