When it comes to growing money, time is your best friend. Unfortunately, the biggest problem most people who are saving for retirement face is that they start too late in life to achieve a comfortable retirement lifestyle. As a result, the cycle of beginning late continues from one generation to the next. As parents, we can end the pattern and set our kids up for success. But it starts with education and action.
The Power of Compounding Returns
Compounding interest is essentially earning a return on your past returns. Having this process continue year after year is what creates most of the wealth from people who have a lot of money in their retirement accounts.
The Rule of 72 is a method for estimating an investments time to double. In its simplest term, an investment growing at 7.2% will double every ten years. As an example, $100,000 becomes $200,000 in 10 years, $400,000 in twenty years and $800,000 at year 30. This assumes no additional monies invested.
It is through compounding interest and the power of money growing exponentially over time that you can make the greatest impact on the financial future of your children.
Goal: Retire at age 65 (55 years from today)
Have $48,000 per year retirement income (in today’s dollars) at the time he / she retires
(This means he / she will need $11,887 per month in future dollars to equate to what $4,000 buys us today – based on a 2% annual inflation rate)
Investment averages 7.5% annual return
Needs investment to last until age 100 (35 years) – Balance will be $0 at age 100
To meet this goal, all that you need to commit to is investing $232 per month until the child retires at age 65. By starting young, this achievable goal can be accomplished. You will set your child up for financial success in a way that he / she can easily sustain. This is how legacies begin.
The Hardest Step is the First
A two-inch piece of metal can hold a train back from starting down the tracks. However, once in full motion, a train has the strength to break through a steel wall. Both good and bad habits are generally difficult to start. However, once in full motion, they are hard to quit. Saving is nothing but a habit that needs to be developed. Once mastered, the pain of breaking the habit of saving is greater than the pain of maintaining the discipline.
I encourage you to make room in your budget to help start the habit for your children. Once they are old enough to earn money, encourage them to continue to the habit. It will be much easier for them to continue growing a retirement account than it will be for them to start one.
Even if it’s only $40 per month, it’s much better than nothing at all. Over time, increase the amount contributed. Watching it grow and knowing that you are helping to build a legacy that will out-live you will inspire you to maintain the habit and increase the amount you contribute as time goes on. Once your child makes enough income to continue this goal, pass the responsibility on to him / her. It will be one of the greatest life lessons they will be taught.
What to do Next:
I encourage you to visit our website at citycreekmortgage.com, click on “Tools” and then “Retirement Calculator”. Run a scenario for yourself and then do one for your kids. By playing with longer timelines, you’ll clearly see the benefit of starting early. Then, call your bank or a trusted financial planner to help set up the accounts and get rolling!