At lunchtime in downtown Boston after Christmas, the streets were thick with people dashing around to stores and going out to eat. Leah Volpe was carrying a shopping bag in one hand. And she was about to do something that might make her financial planner quit in protest â€” she’s pulling out money from her 401(k) so she can go to Bermuda on vacation.
“I’m going to enjoy myself,” she says “I’m only 31 so I don’t really care about retirement yet.”
That’s because you’re not very bright, dear.
If you invested your $1200 for the next 34 years at an 8% return, it would be worth over $18,000*.
At a 10% return, an assumed stock market average, it would be worth over $35,000.
If you did even better and managed to earn 12% per year, you’d have over $69,000 at age 65, without having ever added another penny.
Naturally, you’d be adding a lot of other pennies along the way, unless Bermuda beckoned you to bronze your bosoms and buns every Boston winter.
Here’s an example: If you start saving $300 a month â€” or $3,600 a year â€” when you’re 25, and earn an 8.5 percent annual return and reinvest your earnings, that money will be worth $1,064,457 when you’re 65.
But if you wait until you’re 35 to start saving the same amount, you’ll only have $447, 173. If you wait until you’re 45 you’ll have even less â€” $174,000. Think about that. If you start when you’re 25, you’re saving for just twice as long, but earning more than eight times as much money.
The reasoning skills of such people are the single, best argument against privatizing Social Security. Don’t get me wrong: I would love to have all of my share of FICA back to invest as I see fit for my own future. However, I fear that if that were the case, I fear I might be hit with an even bigger burden toward the end of my years when the government sees fit to bail out those who could save, but did not do so.
And you know it would (heck, did you sign up for a bad mortgage deal because you thought you could work at Winn-Dixie and afford a $500,000 house with no money down and 100% financing? Well, you’re an idiot and Uncle Sam gonna come make it all better now baby).
Meanwhile, I’m 36 years old and (currently, stock market gods be honored and praised) on track to retire at age 65 with nearly $2 million. However, I’ve never been to Bermuda, so I guess Leah has that on me.
Shorter version: save for your retirement. The sooner the better. Because I would rather, given the choice, support those who really could not afford to save much rather than those who blew it all on cabana boys.
Depending on the investment calculator you use, you will get different results based upon when it the investment is compounded, when contributions are counted, etc. Regardless, the lesson is the same: don’t take money out of your 401(k) for stupid stuff.