(or, The Real Reason Youth Beats Wisdom Every Time)

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© 1998-2000 Brian F. Schreurs
Even we have a disclaimer.

He who laughs last killed all the witnesses.
I'll bet you don't think about retirement finances one bit, do you?


But of course you know that. Everyone knows that. And everyone is sick and tired of hearing about it. You scream prove it! but nobody can, since compounding is complicated stuff and hard to work out on a normal calculator.

As you may have guessed by now, we're going to prove it.

We have a handy-dandy investment calculator which does all the complicated stuff automagically. All we have to do is punch in a few numbers. So let's do it.

First, let's say you intend to retire at age 65. Next, let's say anything you invest in will return 10 percent. That is way, way low for equity funds, but hey... if we used real numbers, you probably would think we're full of crap. Finally, let's say that you pay a 30 percent income tax. Hopefully you pay less than that, but again we're playing it conservative.

Here's why you should start saving now. You're 25 years old, and you save $100 per month in a normal mutual fund. Say you do this for, oh, 10 years -- age 35. But then you have a family and can't afford it anymore, so you stop. When you turn 65, how much will you have? How does $140,484.23 sound? Not too shabby.

But suppose you decided that saving could wait till you were older, so you don't start saving until you're 45. You'll need to save $269 a month -- almost three times as much for twice as long to get the same exact result.

Now let's say you don't quit saving -- you put away $100 per month from age 25 to age 65. What's that worth? How about $262,481.34. You'd need to save $504 per month to get the same amount, if you started at age 45.

"Sure," you say. "But I can better afford $500 a month at age 45 than I can $100 a month now." Can you be so sure? Even if you are sure, look at this: You save $100 a month between age 25 and 45, then the big $500 a month from age 45 to 65. That's worth $470,852.02! If an extra $208,000 won't get your attention, I don't know what will. Or do I...?

Let's review. Assuming an annual return of 10 percent and an income tax of 30 percent:

  1. $100/mo. for 10 years; compounded for an additional 30 years: $140,484.23
  2. $100/mo. for 40 years: $262,481.34
  3. $100/mo. for 20 years; $500/mo. for 20 more years: $470,852.02

There is one part of this equation you have control over: Taxes!! When you invest, your money gets taxed twice. Once when you earn it, and once when you claim capital gains on it. You can eliminate one layer of taxes, the capital gains tax, by investing in an IRA. You can eliminate both layers of taxes by investing in an employer-contributed IRA!

What happens to our little scenarios when taxes are removed?

  1. $100/mo. tax-free for 10 years; compounded for an additional 30 years: $406,359.21
  2. $100/mo. tax-free for 40 years: $632,407.96
  3. $100/mo. tax-free for 20 years; $500/mo. tax-free for 20 more years: $936,155.47

If an extra $430,000 doesn't get your attention, I really can't help you!!

And it gets better. If your investments do just one percent better, 11 percent, then Scenario 3 will be worth $1,206,267.90!

I know this is starting to sound like one of those hokey chain letters, but I'm not selling you anything. I have nothing to sell. All I'm asking is for you to invest in yourself -- the easiest way to make money is to save money.

Time to put my money where my mouth is! Well, no, I'm not going to reveal my portfolio to the world. But I will at least point you in the right direction to build your own portfolio. The following companies have funds worthy of your scrutiny:

American Century
T. Rowe Price

Of course, this is hardly an exhaustive list. But, like all things on Neptune, we don't link 'em unless we know good things about 'em.

PS. No thanks to Fidelity who took down their cool ticker tape. Thbbbt.