In response to the earlier post on compounding, Dave pointed to the latest from Ben Stein, “Six key principles of saving for retirement”. According to Stein’s column, your retirement income is affected by:
- How much you save. The more you’re able to set aside, the larger the pool of money on which the other forces can act. There’s a significant difference between investing $20 a month and investing $200 a month.
- How long your savings compound. When you’re young, time is your ally. Make the most of it.
- How you allocate your money. Like many smart people, Stein is a fan of index funds.
- How much your investments return. This is beyond your control, of course. Stein says that you can help maintain consistent returns if you’re able to afford real estate investments. This sounds like an Advanced Topic.
- How low you keep fees and costs. The less you pay other people to manage your money, the more money you have to invest.
- How well you minimize taxes. Take advantage of 401(k)s and IRAs!
Stein believes that the three most important factors in retirement savings are: starting early, saving as much as possible, and diversification. To illustrate the power of compounding, he writes:
“A thousand dollars socked away when you’re 20 and growing at 10 percent per year will be almost $73,000 when you’re 65. The same sum saved when you’re 50 will grow to $4,200 at age 65. That’s a stunning truth that should compel any young person to start saving early — and the rest of us to start right now.”
I think the most important factor in retirement savings is psychological. From experience, it’s a difficult subject for a 21-year-old to grasp. When I was 21 and newly out of college, I couldn’t be bothered to save for retirement. Retirement was more than two lifetimes away — I thought I had forever to worry about it. A couple of friends had already begun to save; I thought they were crazy. I spent my money instead.
Now I’m 38 and only just beginning to save for retirement. I’m behind the curve. I’m fortunate that my company has been diligently putting money away for me over the past decade — otherwise I would have zero savings!
If a young adult is able to master her urge to spend and is able to take the long view, she will quickly find herself ahead of her peers.
[Ben Stein: Six key principles of saving for retirement]
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