Thinking about young adults as they think about their careers, manage cash flow, decisions on spending and savings, Cornerstone would like to offer insight and tools to help you help them create the conditions for a promising financial future.
We often hear from clients in the planning process, “Wish we had started earlier.” Regardless of the forecast of their plan (ex. they will have to make adjustments to make their plan work. Or, their financial plan looks promising. A few changes will make it stronger). Regardless, many express regrets for not starting earlier, or wish for a do-over.
With many sheltered at home, this could be an excellent opportunity to help others by sharing perspective and resources.
Below you will find a narrative about saving early and letting time strengthen investments. Also attached, you will find two graphs that make a case for getting started by savings at a young age. To help you prepare for this conversation, we are happy to talk with you. And if you let us know what other types of financial discussions you would like to have with America’s youth, perhaps we have a chart or narrative that can help you.
Please feel free to pass this along to anyone you think may find this helpful.
Rich Arzaga, CFP®
Narrative: Saving Early & Letting Time Work for You
The earlier you start pursuing financial goals, the better your outcome may be.
As a young investor, you have a powerful ally on your side: time. When you start investing in your twenties or thirties for retirement, you can put it to work for you.
The effect of compounding is huge. Many people underestimate it, so it is worth illustrating. Let’s take a look using a hypothetical 5% rate of return.
How does it work? A simplified example goes like this: Let’s take a look using a hypothetical $100 invested and a 5% rate of return. After a year, you earn 5% interest, or $5. Another year, another 5%, which adds $5.25 this time. In the third year, your 5% interest earned amounts to $5.51, bringing your balance to $115.76. The more money you deposit, the higher that 5% returns. So, if you were to deposit $100 every month into that same account, you’d make a hypothetical $836.63 in compound interest from $6,100 in deposits over five years. That compounding continues, even if you stop making deposits. All you need to do is let that money stay put.1
The earlier you start, the greater the compounding potential. If you start saving and investing for retirement in your twenties, you may gain an advantage over someone who waits to save and invest until his or her thirties.
Even if you start early & then stop, you may out-save those who begin later. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – no new money going into the account for the next 30 years. That is hardly ideal. Yet, should it happen, you still might come out ahead of someone who begins saving for retirement later.
Are you wary of investing? If you were born in the late eighties to early nineties, you are old enough to remember the market volatility in the early 2000s and the credit crisis of 2007-09. Recent events, in the wake of the coronavirus, might bring back memories of that time. All this may have given you a negative view of equities, shaped during your formative years; these events are clear examples of how risk plays a part in this type of investment.
The reality, though, is that many people preparing for retirement need to build wealth in a way that has the potential to outpace inflation. You will retire on the compounded earnings those invested assets are positioned to achieve.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results, All indices are unmanaged and may not be I invested into directly.