View Full Version : When Is $30K Worth $90K? When You Save It In Your 20s
NBC News**05/29/13 1:34 PM ET
By: Bob Sullivan, NBC News
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Recent college graduates who score their first job might be tempted to splurge on a new car or an apartment that's a little out of their price range. But 20-somethings are in an incredibly unique position to set up their financial future, if only they could teach themselves to think backward about retirement savings .
It sounds like a math trick, but it's really just harnessing the power of time: Someone who saves for retirement during their 20s and completely stops a decade later will have more at age 62 than someone who starts saving in their 30s and spends the rest of his or her adult life trying to catch up. Yes, 10 years of savings can be worth more than 30 years of savings. This may be the only time when something that sounds too good to be true really is true.
If you know someone who's recently graduated or started a first job, sit them down and show them what personal finance advisers call "The Parable of the Twins."
Liz Weston, in her book "Deal with Your Debt," offers this simple illustration. One twin puts aside $3,000 every year in a Roth IRA starting at age 22, and stops at 32. She never adds another penny. Her brother starts saving $3,000 annually at 32, and continues until age 62. Who has a larger retirement kitty?
Assuming an average 8 percent return annually, the twin sister wins rather handily. She has $437,320, compared to her brother's $339,850, even though she contributed two-thirds less of her own money than her brother ($30,000 vs. $90,000).
Of course, different assumed returns would change the grand total, but lower or higher rates don't change the fundamental principal: Dollars saved in your 20s are worth a lot more than dollars saved later in life.
"It's counterintuitive for people to open up their time horizons, but the difference it makes is incredible," Weston said. "We focus on our immediate past and present at the expense of the future."
And that can get pretty expensive. Thanks to compounding returns, every $1,000 that someone in their 20s doesn't save costs them more than $10,000 at retirement.
'Hard to catch up'
"You rob the money of time to earn returns, and time for those returns to earn returns," she said. "If you put it off, it gets increasingly hard to catch up."
Not surprisingly, U.S. workers often have it backward. Most people save a little for retirement when they are young, and increase participation and contributions as they get older. A study by Aon Hewitt in 2010 found that Generation Y workers (under age 30) average 5.3 percent contributions to their 401(k) plans, as compared to 6.8 percent by Gen X workers (31-45) and 8.4 percent by older workers. Those older workers are trying to catch up, but probably wish someone had told them the Parable of the Twins when they were younger.
No one who tells the parable thinks it's a good idea to stop saving for retirement at age 30, of course. But it does happen. When young adults start families, take on mortgages, and face other life hurdles, sometimes retirement contributions are the first to go overboard. Workers who have saved a lot in their 20s are in a much better position to weather a storm and still have a retirement savings cushion.
Weston is among those personal finance experts who think young adults and families focus too much on paying off debt at the expense of saving for retirement. Debt payments and retirement savings should be balanced, she believes.
The instant payoff of paying down a 15 percent interest credit card balance is obvious, but in the long run, $1,000 saved for 30 years in an IRA can be far more valuable ($10,935) than the cost of carrying $1,000 in debt for an extra year or so ($150).
That outlook holds for student loan debt, too. Pay down the debt, of course, but don't neglect retirement savings just to pay extra to reduce a student loan balance, Weston says.
She thinks the best thing recent graduates can do is avoid the urge to splurge.
"Continue living like a broke college kid for a few years and save the money. You will be amazed at what the difference is," Weston said.
At 22, some Singaporeans just started University, most boys just ended army and those who are working already are not earning much for basic necessities, not to mention investing/saving extra $$.... 25 years old is more realistic an age for most Singaporeans! :rolleyes:
Neat read... I never have such advices when I was starting out in the work force! :47:
Most parents have already started saving for their children via piggy banks (traditionally), insurance (last 10-20 years) and property (latest and reserved for the rich).
U all never read the sunday strait times last week? A graduate 24yrs old bought stocks and then bought a condo in 2009. Make $300k after selling it. Now 27yrs old already got two condo and one of it is 3 bedder.
U all never read the sunday strait times last week? A graduate 24yrs old bought stocks and then bought a condo in 2009. Make $300k after selling it. Now 27yrs old already got two condo and one of it is 3 bedder.
U will never get to read 100 others who lost their pants in stocks.
I would say this man buy stocks at the right time.
It is correct to Buy property at young age when u hav enough to down payment, do not wait.
But Stock is different economy up but stock can still be down. It depends on company performance.
I would say this man buy stocks at the right time.
It is correct to Buy property at young age when u hav enough to down payment, do not wait.
But Stock is different economy up but stock can still be down. It depends on company performance.
I din read the story. But where did he get the seed money at age 24 from?
Time value of money is what our bro chestnut always emphasized. Now at least I will make sure that my kid will be the next chestnut.
I din read the story. But where did he get the seed money at age 24 from?
I think he and his gf come out with $40k during 2009 to buy stocks. After making some money in stocks, he bought and a property and resold it later for $300k profit.
I think he and his gf come out with $40k during 2009 to buy stocks. After making some money in stocks, he bought and a property and resold it later for $300k profit.
I think bulk of $40k could be from his girlfriend who most likely had started working. I'm not too clear how a fresh graduate can have so much savings. Most would be still in debt to the university. So the moral of the story is to find a rich girlfriend and dabbble in stocks, then move on to property :p
That guy featured in the papers is but one in a few hundred thousand. ST likes to blow out of proportion such individuals and inevitably create an inaccurate picture of lifestyle and achievement. Fundamental life skills such as prudence and discipline is not taught here. Whack young and strike it rich appears to be the subtle message. No point if one doesn't have discipline in the stock market or even in the housing market. More important to teach those other attributes or at least mention them in their reports. One told successful story comes with ten thousand untold unsuccessful stories.
The calculation is based on 8%, interests. Change it to 3% for a more reasonable rate of returns. If store in bank at 0.1%, you think there will be any difference?
Best is still have parents who are URA planners who can buy $10 million condo for you.
this article is so insidious. encouraging people to save - ie lend money to the banks.
Join the Airforce in 1984, got my first bite of the cherry in 1988 for SGD 83,000 HDB 4A. Sell 7 yrs later collect a cheque from HDB SGD 180,000. Bite another cherry for SGD 250,000 down 20% now val SGD 595,000.
Eat cherry better, don't try to save. go for the biggest cherry you can eat.
Join the Airforce in 1984, got my first bite of the cherry in 1988 for SGD 83,000 HDB 4A. Sell 7 yrs later collect a cheque from HDB SGD 180,000. Bite another cherry for SGD 250,000 down 20% now val SGD 595,000.
Eat cherry better, don't try to save. go for the biggest cherry you can eat.
This is a more pragmatic method than the one mentioned in the article.
Agree, stay in HDB and still get pay SGD 180,000 after 7 yrs.
This is a more pragmatic method than the one mentioned in the article.
There are several approaches available for the commoner, but not everything can be shared online
Time value of money is what our bro chestnut always emphasized. Now at least I will make sure that my kid will be the next chestnut.
Time value of money and compounding interest or dividends.
20 years ago, I contributed 6000 GBP to the UK equivalent of SRS (in order to have income tax relief) and left it in that account. FULLY invested in equities all that time and bought more equities periodically with the dividends as not allowed to top up in cash. Today the value of that portfolio is 41000 GBP. It has gone through a number of financial crises (dotcom bust, SARS, Lehman, etc). I have a diversified bunch of stocks in there but mainly defensives - tobacco, utilities, oil (BP was my original largest holding). I have also bought some lemons. For example, Northern Rock bank which got taken over by the Govt - lost all my investment in that. I noticed that some stocks go in opposite directions during boom and bust cycles. But overall the portfolio increased in value.
In Singapore, you tend to look at the absolute value of your stock price and think oh, didn't make much profit.....but you also need to count in the dividends you received along the way. They do add to your overall return over a period of decades. And we tend to ignore the dividends and not count them as part of our profit from the stocks.
I am not boasting here but just to share that with a longer time horizon, investing early can bring rewards. 6000 GBP is not a large sum of money and I could have wasted it on something trivial rather than investing it at the time.
One silly article can get all the hidden tiger drunken dragon old birds to come out share their secret tips. Not bad at all. LOL.
In this new day and age where people just drop dead like flies, ask yourself if saving over decades continue to be relevant as a money making strategy.
Never forget the purpose of making all that money. For happiness and enjoyment. Lets just ensure we live long enough to reap it. Otherwise, spending whatever you have now and making the best of it isnt that bad a concept too.
One silly article can get all the hidden tiger drunken dragon old birds to come out share their secret tips. Not bad at all. LOL.
In this new day and age where people just drop dead like flies, ask yourself if saving over decades continue to be relevant as a money making strategy.
Never forget the purpose of making all that money. For happiness and enjoyment. Lets just ensure we live long enough to reap it. Otherwise, spending whatever you have now and making the best of it isnt that bad a concept too.
I don't get too much enjoyment out of spending money as much anymore now. However I get plenty of enjoyment spending time with my kids. I consider the money I spend on cars and hobbies during my youth as useless. Should I invested all those money, I would be happier now. My motto. "Live fast and die young" is not working out for me.
I don't get too much enjoyment out of spending money as much anymore now. However I get plenty of enjoyment spending time with my kids. I consider the money I spend on cars and hobbies during my youth as useless. Should I invested all those money, I would be happier now. My motto. "Live fast and die young" is not working out for me.
Uncle, thats coz u 'been there done that'. cheers :cheers6:
I don't get too much enjoyment out of spending money as much anymore now. However I get plenty of enjoyment spending time with my kids. I consider the money I spend on cars and hobbies during my youth as useless. Should I invested all those money, I would be happier now. My motto. "Live fast and die young" is not working out for me.There needs to be an intricate balance between enjoying early OR enjoying later. Some people say u save save save when young but die young so cannot enjoy at all. Some people say u enjoy enjoy enjoy when young so nothing left when old if you are still around.
I always believe you must be disciplined. Have a sum to be saved monthly. Buy a simple car when young (no need to live like a vagabond if you can afford to live differently). Here, I'm not referring to those who earn very little (just enough for basic livelihood).
Its those who splurge beyond their earning power and don't save that will have problems later. That is why I don't fancy the idea of giving everything to a child. This child will not understand the need to save. Just splurge. Next time he'll suffer big time when the parents sayonara...
That guy featured in the papers is but one in a few hundred thousand. ST likes to blow out of proportion such individuals and inevitably create an inaccurate picture of lifestyle and achievement. Fundamental life skills such as prudence and discipline is not taught here. Whack young and strike it rich appears to be the subtle message. No point if one doesn't have discipline in the stock market or even in the housing market. More important to teach those other attributes or at least mention them in their reports. One told successful story comes with ten thousand untold unsuccessful stories.
Spot on !!! :cheers5:
There needs to be an intricate balance between enjoying early OR enjoying later. Some people say u save save save when young but die young so cannot enjoy at all. Some people say u enjoy enjoy enjoy when young so nothing left when old if you are still around.
I always believe you must be disciplined. Have a sum to be saved monthly. Buy a simple car when young (no need to live like a vagabond if you can afford to live differently). Here, I'm not referring to those who earn very little (just enough for basic livelihood).
Its those who splurge beyond their earning power and don't save that will have problems later. That is why I don't fancy the idea of giving everything to a child. This child will not understand the need to save. Just splurge. Next time he'll suffer big time when the parents sayonara...
Spot on !!:cheers4:
That guy featured in the papers is but one in a few hundred thousand. ST likes to blow out of proportion such individuals and inevitably create an inaccurate picture of lifestyle and achievement. Fundamental life skills such as prudence and discipline is not taught here. Whack young and strike it rich appears to be the subtle message. No point if one doesn't have discipline in the stock market or even in the housing market. More important to teach those other attributes or at least mention them in their reports. One told successful story comes with ten thousand untold unsuccessful stories.
Absolutely !:D
based on magic of compounding,
better to buy FH condo or LH condo if LH is 20% cheaper and can get 8% return per year.
so at the end of 40 years, even though the value of LH is cheaper than FH, that 20% savings can compound at 8% annually, so the total value of (LH condo + 20% savings compounding) should be more than FH condo right?
Uncle, thats coz u 'been there done that'. cheers :cheers6:
I totally agree man...
ask a 50 year old man who have never driven a S class or Cabriolet if he wants want now or spend time with his kids? He will say he wants both....
Ask a man who has eaten abalone all his life if he wants more abalone? He will say he prefer teochew porridge...:D
I totally agree man...
ask a 50 year old man who have never driven a S class or Cabriolet if he wants want now or spend time with his kids? He will say he wants both....
Ask a man who has eaten abalone all his life if he wants more abalone? He will say he prefer teochew porridge...:D
Are u calling my wife abalone? I admit I fancy for some "teochew porrige" now.
based on magic of compounding,
better to buy FH condo or LH condo if LH is 20% cheaper and can get 8% return per year.
so at the end of 40 years, even though the value of LH is cheaper than FH, that 20% savings can compound at 8% annually, so the total value of (LH condo + 20% savings compounding) should be more than FH condo right?
Correct in some ways. But the extra 20% is paid out in 30-40years, plus interests. So have to sit down and count very precisely to be sure.
Also, if you are handed a property from someone, would you hope for 50 years lease or freehold?
phantom_opera
01-06-13, 13:27
mcm l like your hidden tiger drunken dragon analogy
:D
I think I slightly older than u and younger than most of the drunken dragon generation
My thoughts on saving young and let it compound is:
1. If you never actively managed it, it is just luck as the starting point is important. Most of the Singapore baby boomers are sitting on a pile of fortune not because they actively manage their portfolios like Soros/Buffet but simply because post-2nd-world war, those who just passively invest along with US capitalists / PAP will make money no matter stocks, HDB, condos blah blah
2. Of course, some are smarter than others (like they have insider news where the MRT will be or foresight) ... still you have to thank the system and US capitalists
3. The important question is whether young ppl starting up today will be as fortunate as the baby boomers ... raise your hands if you think you can get 9%pa compound return for next 30y investing in STI ETF or properties by just holding them
Of course, some people are just lucky due to good karma or bornt with silver spoon... if you are very lucky when starting young, then u just need to avoid big drawdown in later stage of life everything will be SUI SUI
and I don't understand why ppl bashing the MDA girl for buying Coral 10m condo .... it may turn up a bad investment u know
:2cents:
phantom_opera
01-06-13, 13:33
and 30k->90k is only 3x, no big deal for 30-40y of golden era
I thought Tiong Bahru HDB in 1969 was only 6k .. now is 3xxk :scared-3:
This is a more pragmatic method than the one mentioned in the article.
https://www.youtube.com/watch?v=k4xrmNEp-Mo
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