Just last week Mr. Winning Williams and I were preparing to host an old friend of mine who was in town on business. We hadn’t spoken in a while but I remembered that she was one of the brightest people that I knew in college, driven and dedicated and now at the beginning of a promising career.
During dinner she politely asked Mr. Winning Williams what he did for a living and we eventually made our way onto the ever popular topic of finance (or, popular for us, as we would find out.) And then she said something that almost broke my heart. “Yeah, I don’t want to even think about stocks or investing, I’m too afraid to deal with that.”
Afraid? This intelligent and abundantly capable woman afraid? Of investing? Of the most important thing that could help her save for her retirement? I was astonished. We both attended a university that prides itself on preparing alumni for the real world with hands-on job experience and career development courses. How could she be avoiding something that should be so vital to her ability to retire after a successful career.
I was in her exact shoes not many years ago.Somewhere along the way, between mock-interviews and that one-credit class that we were ALL required to take about networking and setting up a LinkedIn account, no one ever explained the basics of personal finance. I recall at some point in that one-credit career development course that I was told to never accept a first offer (cruel joke, when I graduated in 2010). Not one time had there been a discussion of taking advantage of your employers 401k or 403b. Never was it explained what an index fund is, employer matching, how to get a 100% return on your contribution to a 401k plan, or how to review the investment options within those tax advantaged accounts. Not once was the distinction made between the maximum that a company will match in contributions to a 401k and the maximum that an individual is allowed to contribute each year before facing tax penalties.
When I started my first job out of college I contributed only 2% of my paycheck to my 401k because I thought that was a “good starting point.” Granted, this was better than 0%, but the ramifications of that arbitrary choice will impact the age at which I can retire. I also selected the “target fund” for the date that society has told me I am “supposed” to retire. I did no further investigation about what other funds were available or the expense ratio of this fund, and didn’t want to pretend that I could have understand them anyways.
When I left that job and decided to roll that 401k into an IRA I was upset with myself at how little I had put aside. For all of my budget-savvy I had also been “afraid” of investing. It wasn’t until a dashing young man with a killer smile and an impressive knowledge of personal finance entered my life that I started to learn more. I now contribute the maximum ($18k limit annually for those under 50 years of age as of 2015) to my 401k.
Let’s look at the following two tables. Both start at the age of 30 and assume no existing savings, thus impacting the time to retirement. The first shows an average American household, making $52,250 a year, saving for retirement at different levels of their income. We assume that this first person has a real rate of return on their savings equal to 0% (essentially the small amount of interest that they do earn is equal to inflation, so over time their real spending power doesn’t grow). This would likely result from avoiding the stock market and being too conservative with their investments. While one will want to become more conservative over time, this table highlights the drawbacks of such caution in an investment portfolio. We can see that they don’t ever save more that $1MM unless they boost their savings to 60-70% of their income and even then they will need to work until they are 60 or 65 to reach this threshold. We will cover the amount that you need save to retire in a later article.
Now, if we look at the the same person who is now educated in the basics of selecting their investment portfolio and assume earning a real rate of return of 5% (we will post an article with some insight into this). Now they are able to see their retirement fund grow significantly over time. Granted, the right balance of investments is a very personal choice; however, by having the knowledge on how to achieve this expected rate of return they are set up for a more prosperous retirement. At a 30% savings rate, the difference in investing and receiving a 5% higher return results in over 1 million of retirement income ($1.57 million vs. $0.56 million).
Why do colleges allow students to graduate, in full knowledge that most of them have student loan debt (we’ll discuss this later as well), and not once mention that the biggest item they will have to pay for (much more expensive than student loan debt) in the future is their own retirement? Why aren’t graduates being equipped with, or at the very least being provided access to a primer on, how to save for retirement from a young age.
Getting a job after college is extremely important in order to pay off debt. But not providing the basics of personal finance is like teaching someone to fish, but never showing them how to start a campfire to be able to cook said fish.
If we really want to help the youth of America have a prosperous future then basic banking and personal finance skills needs to be incorporated at a high school level. If we are ever going to see a society where massive debt and fear of planning for retirement is no longer a national headline, then schools should also be required to teach a primer course on personal finance to all enrolled students. This should produce a generation that feels empowered to start saving for retirement the day they have that diploma in hand (if not sooner).