We all remember what it was like to be a kid. Even thirty years old seemed ancient and so far in the future that it would never happen.
Needless to say, it’s difficult to expect kids to give thought to their retirements and the fact that the decisions they make when they’re young will have sizable effects on their quality of life during the golden years.
Still, there are a few lessons you can teach your kids, even while they’re so young they have trouble comprehending life beyond high school, that will get them to appreciate the value of saving for retirement the right way.
Compound interest is why it pays to start saving early!
Let’s say a kid graduates from college, goes on to get his Master’s degree, and enters the workforce at the age of 25.
If he immediately begins saving for retirement, it will only take $4 per day over the next 40 years (at which point he will be 65) for him to retire a millionaire. This is assuming normal market returns over time of 10 to 11 percent.
However, if he decides not to worry about saving for retirement until he turns 30, and he invests $4 per day, he will retire with a savings of just over $500,000 — about half of what he would have if he had started earlier.
Waiting only five years to start saving for retirement cost him over five hundred grand — or half his potential retirement savings.
The numbers are even more dire if he waits until he’s 35. That $500,000 number gets cut down to just over $300,000.
This is due to the power of compound interest. The longer you have money sitting in an investment account earning interest, the more that interest compounds, and the more money you make.
Therefore, there is no substitute for starting early when it comes to retirement savings.
It doesn’t take much!
Look at the above example again. We’re talking about only four dollars per day here!
Ask your kid to make a list of things he might consider buying if he had four dollars in his pocket. A candy bar and a soda from the mini mart? A greasy hamburger and soggy fries from a fast food joint? How about a few rounds of skee-ball at the video arcade?
Then ask him which of those he would be willing to forego if it meant becoming a millionaire. My guess is that he would answer all of them.
Young people blow money every day on things they don’t really need, such as overpriced coffee, outfits they’ll only wear once, et cetera. Get your kid in the habit of looking at the long-term picture instead of instant gratification.