The power of time with money…

[ATex7239]

My 20-year-old daughter recently got hired on permanently at a company she has been temping for. Last semester she decided to go from brick and mortar classes to all online classes so she can be more flexible with her work hours. With her degree path it isn’t a problem. She has been busting her butt there. And it paid off. All that said the company has a 7% 401(k) match. I showed her the math with compounding growth.

If she puts in exactly 7% every check to get the match, never increased it or got a pay raise, and didn’t touch it for 40 years, she’ll have approx. $1M mathematically. And 90% of that would be growth.

She’s super stoked about it all. She may not be a millionaire with money yet but she’s definitely a millionaire with her time. A little bit of effort over a long time line can yields huge gains.

 

[JayhawkRoy]

Yep, in general that is a good way to make sure your retirement days are fine. Our company match never approached 7%, but we did fine anyway, starting after age 30 when IRA/401K stuff heated up. Still invested in stock market based mutual funds, even though we are over 70 yrs of age.

 

[JavierH19]

Long term compounding is where it's at. But as long as it's not risky like with enrons employee retirement plan being exposed to its own stock which then imploded she should be fine. I imagine this company is good and its stock if present is ok to be invested in.

 

[Sequoiasoon]

Add to that many places you can set it automatically or just when you get a raise. Add 1% to that even though they are not matching more. 3% raise means 2% for her pocket, 1% for future and do that each year. Before you know it you are adding 15-20% without feeling it.

My dad had me switch to Roth 401k as soon as my company added it. All the earnings later are tax free (at least currently) when you take them at 59 1/2. I couldn't afford to move what I had but all my future is Roth 401k and started about 15 years ago. The Pre-tax is still WAY ahead in value just from the compounding.

Mine has multiple choices to break up % and risk from bonds to S&P, Fidelity Growth, some overseas etc.

 

[ATex7239]

Long term compounding is where it's at. But as long as it's not risky like with enrons employee retirement plan being exposed to its own stock which then imploded she should be fine. I imagine this company is good and its stock if present is ok to be invested in.

The plan is with Fidelity and there are target date funds as well as various index funds options available. The employer is well known and reputable.

 

[dadto2]

Yeah, not only is compounding interest where you make real gains, but not saving enough to get the full company match is just leaving money on the table. We all work too hard to leave anything on the table.
When I was in my 20s, I put more than I could afford into 401k and made it up by delivering pizzas a couple nights per week. Now that I'm in my mid-50s, I am REALLY thankful that I had that foresight back in the day.

 

[ATex7239]

Add to that many places you can set it automatically or just when you get a raise. Add 1% to that even though they are not matching more. 3% raise means 2% for her pocket, 1% for future and do that each year. Before you know it you are adding 15-20% without feeling it.

My dad had me switch to Roth 401k as soon as my company added it. All the earnings later are tax free (at least currently) when you take them at 59 1/2. I couldn't afford to move what I had but all my future is Roth 401k and started about 15 years ago. The Pre-tax is still WAY ahead in value just from the compounding.

Mine has multiple choices to break up % and risk from bonds to S&P, Fidelity Growth, some overseas etc.

The difference between tax deferred growth and after tax growth is huge, but I think for the most part it doesn’t matter. If people would just save that’s the key thing. The problem many face is not putting money in and taking it out too soon. Not whether it’s tax advantage or not.

 

[TnT_M]

My 20-year-old daughter recently got hired on permanently at a company she has been temping for. Last semester she decided to go from brick and mortar classes to all online classes so she can be more flexible with her work hours. With her degree path it isn’t a problem. She has been busting her butt there. And it paid off. All that said the company has a 7% 401(k) match. I showed her the math with compounding growth.

If she puts in exactly 7% every check to get the match, never increased it or got a pay raise, and didn’t touch it for 40 years, she’ll have approx. $1M mathematically. And 90% of that would be growth.

She’s super stoked about it all. She may not be a millionaire with money yet but she’s definitely a millionaire with her time. A little bit of effort over a long time line can yields huge gains.

Glad to hear she is taking the advice! Something I feel is easily lost on today's younger folks.

Your next step is to teach her about a Roth 401K to avoid the capital gains taxes. With a 7% company match she should end up with a nice mix of both traditional and Roth 401k!

 

[mrvmax]

Here is some advice I wish I had been given. When the market crashes, buy all you can. If I would have done that in 2008 I would not be working now. I was able to do that during covid and made a lot of money. As the saying goes, buy when people are selling and sell when people are buying.

FYI a million is a lot but the way our inflation and economy is going she will need 2-3 times that (at least). That is a great start for her but she should be increasing as she gets pay raises.

Congrats to your daughter for starting off well, I wish her the best and an early retirement.

 

[Sequoiasoon]

Yeah, not only is compounding interest where you make real gains, but not saving enough to get the full company match is just leaving money on the table. We all work too hard to leave anything on the table.
When I was in my 20s, I put more than I could afford into 401k and made it up by delivering pizzas a couple nights per week. Now that I'm in my mid-50s, I am REALLY thankful that I had that foresight back in the day.

My dad would max out his 401k each year by like October/November. He had his day job, his own company training mechanics multiple nights weekly and Army reserve. He and mom had a good "budget" but he didn't have extra to take a chunk and put in IRA or other stocks.

He figured it out and would take a loan from his 401k each year with a 2-3 month payback amount for same $$ as he contributed for first 10 months. He took the loan money and put it in dividend stocks or his IRA. Paid by January, cycle repeated. He did ok and retired at 57 with more monthly income than he made working between pensions, 401k, IRA and then social security. Not rich, comfortable, not worried. He passed in '22 but left mom so that she is also comfortable and doesn't use all the incoming at 89.

 

[ATex7239]

Glad to hear she is taking the advice! Something I feel is easily lost on today's younger folks.

Your next step is to teach her about a Roth 401K to avoid the capital gains taxes. With a 7% company match she should end up with a nice mix of both traditional and Roth 401k!

We’ll get there. We just gotta get her heading to the right direction on saving for her future as a habit. As I mentioned above, I don’t think tax deferred vs after tax matters as much as the actual saving/investing and not touching it part. That’s the part many folks miss the mark.

 

[wavinwayne]

One of my regrets in life is not being more financially literate and disciplined in my 20s & 30s. Didn't start seriously contributing to any kind of retirement plan until ~15 years ago. I guess that's a little better than never starting.

 

[ATex7239]

Here is some advice I wish I had been given. When the market crashes, buy all you can. If I would have done that in 2008 I would not be working now. I was able to do that during covid and made a lot of money. As the saying goes, buy when people are selling and sell when people are buying.

FYI a million is a lot but the way our inflation and economy is going she will need 2-3 times that (at least). That is a great start for her but she should be increasing as she gets pay raises.

Congrats to your daughter for starting off well, I wish her the best and an early retirement.

I invested in the 2000s when I first was starting out. I didn’t listen to all the people who told me not to invest in the market. I took Warren Buffett’s advice of do the opposite of what everyone else is doing. I’m so glad I did.

Regarding inflation, the market tends to keep up with inflation, so not a huge worry. It’s one of the best places to be during inflationary times. And even if it doesn’t keep up $1M is always better than no dollars.

 

[TnT_M]

We’ll get there. We just gotta get her heading to the right direction on saving for her future as a habit. As I mentioned above, I don’t think tax deferred vs after tax matters as much as the actual saving/investing and not touching it part. That’s the part many folks miss the mark.

As I noted, great first step in getting her to save.

I have to disagree with the before tax and after-tax piece, but to each their own.

You estimate 90% growth on $1M, so she would invest roughly $100K between the match and her contribution. If it is 50% then she pays tax on $50K. In retirement she would pay tax on the $500K, leaving $450K to tax free capital gains. Here is a quick summary of what that looks like with an assumed 22% tax rate.

Roth
Her contribution $50K @ 22% = $11K tax
Company match and growth $500K @ 22% = $110K tax
Total is $121K

Traditional
$1M @ 22% = $220K.

Yes, I know I have way oversimplified this but look at the numbers. It will make a huge difference.

 

[opus1]

Here is some advice I wish I had been given. When the market crashes, buy all you can...

Many years ago I attended a seminar by an investment club and I remember the speaker saying this sort of thing. His analogy involved a company with a bad earnings report and the stock dropped a bit, but otherwise was a name brand company without any concerning issues. He said "if you like coffee, what do you do when the store puts it on sale? You stock up. Same thing goes with stocks; if the company is otherwise sound but drops for some reason, think of it as going on sale and stocking up as much as you can.

 

[JayhawkRoy]

We’ll get there. We just gotta get her heading to the right direction on saving for her future as a habit. As I mentioned above, I don’t think tax deferred vs after tax matters as much as the actual saving/investing and not touching it part. That’s the part many folks miss the mark.

I can tell you I am paying far more taxes today (inflation adjusted) than I would have paid when I earned the money. Tax deferred made the governments more money than they would have. That would not have changed my strategy, but it is a consideration that was not heavily advertised at the time we started the 401K account explosion.

A lot of people cannot handle not touching non tax deferred money, so the 401K business is a major plus to them.

My senior college year I took an economics course oriented to personal finance and that started and oriented by financial thinking. As a newly married student it was very insightful and helpful. It took me a while to start investing in the stock market mutual fund business but the insights I received still work well today.

 

[ATex7239]

As I noted, great first step in getting her to save.

I have to disagree with the before tax and after-tax piece, but to each their own.

You estimate 90% growth on $1M, so she would invest roughly $100K between the match and her contribution. If it is 50% then she pays tax on $50K. In retirement she would pay tax on the $500K, leaving $450K to tax free capital gains. Here is a quick summary of what that looks like with an assumed 22% tax rate.

Roth
Her contribution $50K @ 22% = $11K tax
Company match and growth $500K @ 22% = $110K tax
Total is $121K

Traditional
$1M @ 22% = $220K.

Yes, I know I have way oversimplified this but look at the numbers. It will make a huge difference.

I understand the math. The point is not about the math, it’s about the long term behavior. That is where most people fail.

If a person ends up with $100,000 greater tax bill, but still retired a seven figure account I would argue they still won in the end.

It’s like arguing which team won the Super Bowl better than the other, team A by three touchdowns or team B by two touchdowns. Both were successful.

 

[Sequoiasoon]

I can tell you I am paying far more taxes today (inflation adjusted) than I would have paid when I earned the money. Tax deferred made the governments more money than they would have. That would not have changed my strategy, but it is a consideration that was not heavily advertised at the time we started the 401K account explosion.

A lot of people cannot handle not touching non tax deferred money, so the 401K business is a major plus to them.

Our 401k rules apply the same. If I touch it before 59 1/2, Roth or Tax deferred there is a 10% penalty plus many things to show need for it. Yes exceptions but they make it difficult for a reason.

 

[Sequoiasoon]

I understand the math. The point is not about the math, it’s about the long term behavior. That is where most people fail.

If a person ends up with $100,000 greater tax bill, but still retired a seven figure retirement I would argue they still won in the end.

It’s like arguing which team won the Super Bowl better than the other, team A by three touchdowns or team B by two touchdowns. Both were successful.

And with your guidance she will have a great start and do well. Hopefully winning many superbowls.

Good job in teaching her and bringing her up to look for the work opportunities!

 

[mrvmax]

Many years ago I attended a seminar by an investment club and I remember the speaker saying this sort of thing. His analogy involved a company with a bad earnings report and the stock dropped a bit, but otherwise was a name brand company without any concerning issues. He said "if you like coffee, what do you do when the store puts it on sale? You stock up. Same thing goes with stocks; if the company is otherwise sound but drops for some reason, think of it as going on sale and stocking up as much as you can.

I should add, buy stocks that are worth buying. That sounds dumb but pick stocks that are undervalued. During covid Marathon Oil Corp stock got down below $3 a share if I recall correctly. I knew they were not going out of business so I bought as much as I could and sold it when it hit $30.

I know people who try to pick the next Microsoft and so far have been unsuccessful. You can gamble on long shots or buy undervalued stocks and bank on longevity.