Happy Father's Day .... Billy Graham and Life's Biggest Surprise

Billy Graham was once asked what had been life's biggest surprise. In reply he said simply, "The brevity of it." I'll vote for that.


When we are young, old age seems like it will never come our way. But faster than our younger self once thought possible, we quickly reach oldster status, and then we marvel at how very quickly it has arrived. At least that's what happened to me.


Time inconsistency simply means that we tend to value the here and now more than the future when taking actions, no matter what logic may dictate. In other words, satisfying the pleasures of our present self is often and incorrectly deemed substantially more important than being in a position to fulfill the needs of our future self, and that's not a good thing.


To wit, that 'bird in the hand over the bush' preference generally works to the long term detriment of ourselves and our families.


So now let's enter debt and its debilitating impact on our lives into the discussion right alongside the dangers of time inconsistent choices and behaviors.


In our younger years, we tend to sign up for the maximum in student loans, take out credit cards, and borrow for that first new car. Then to top it off, and with the "help" of a realtor and complicit bank, we proceed to borrow more than we should to purchase a more expensive house than we can afford.


And this home purchase, like the student loan, is aided and abetted by incentivizing government loan guarantees, mortgage interest deductions, property tax deductions and so forth. That's not good for us, but we don't learn that most valuable lesson until much later in life.


So now we have interest on the newly assumed debt as well as its principal to begin to repay. As a result, we don't begin to set aside enough money for our old age in the form of savings and IRA or 401(k) investments.


The benefit of saving early in adulthood is well explained in High Cost to Focusing on Student Loans Over Saving:


"{The} household tug of war for every dollar a family earns has not been a big part of the discussion of the long-term impact of the trillion-dollar student loan debt overhang. . . .

It’s hard for new college graduates — let alone teenagers making the initial borrowing decisions — to wrap their heads around this possibility when the shortfall is 40 or 50 years away. The whole world is telling them that they should go to college, and they should. But taking on debt to do so leads hundreds of thousands of new graduates each year to forgo saving money for years afterward. The long-term cost ought to be part of the bigger conversation....

Assume that two people graduate from college in the same year and get a job earning the same $45,000 salary, with equal raises over time. (Let’s stop here to allow for the fact that plenty of people take on debt without ever graduating, and plenty more get their degrees but end up in low-paying jobs that don’t require one.)

One individual has a pile of student loan debt and spends the next 10 years single-mindedly paying it down before saving anything for retirement. The other starts saving 4 percent a year (plus an annual 4 percent employer match) and increases it by a percentage point each year until reaching the $17,500 annual pretax maximum that the federal government sets for workplace retirement savings plans. The person with the debt starts saving the same amount at the same rate at age 32, once the student loan balance is zero.

Both people earn 5 percent annual returns on their investments over time. By the time the pair turn 65, the individual with the 10-year head start will have $1,829,571 in a retirement account in today’s dollars. That’s $396,039 more than the $1,433,532 in the account that belongs to the person who spent a decade paying off student loan debt before saving....

                Savings Gap       

The difference between starting to save for retirement at age 22 and putting it off for 10 years while you pay down student loan debt can be a large gap in what you could potentially accumulate by age 65.

SAVINGS

AT AGE 65:

Two scenarios

of saving

for retirement

$2.0

million

$1,829,571

1.5

$1,433,532

AGE

22

32

1.0

SALARY

$45,000

$54,855

SAVINGS

$3,780

$10,368

AGE

25

35

45

55

65

$2.0

million

SAVINGS

AT AGE 65:

$1,829,571

1.5

Two scenarios of

saving for retirement

$1,433,532

AGE

22

32

1.0

SALARY

$45,000

$54,855

SAVINGS

$3,780

$10,368

AGE

25

30

35

40

45

50

55

60

65

                   

Again, the case for college is clear. . . . the earnings gap between American college graduates and everyone else has never been higher. People with a diploma now earn 98 percent more per hour on average than those without a degree.

So go to college. But parents of teenagers ought to consider several possibilities to keep their children out of debt and out of the eventual retirement savings hole: community college for two years instead of four years at a public university; working in college in lieu of additional debt; living at home during college; not taking on debt (especially private loans that aren’t from the federal government) to attend a more expensive college, even if it is a dream school.

Parents who want to assist their recent college graduates might consider doing so with contributions toward an Individual Retirement Account. And grandparents who expect to have a bit of money to pass on to heirs might advance some of that money to young adult grandchildren, who can benefit from a half-century of compounded interest if they put the money away and leave it alone. . . .

This is not the news anyone wants to hear. It is hardly fair that millions of young adults should be saddled with debt at the same historical moment when they’re increasingly responsible for paying for retirement and health care.

But this is the world we live in, where college is necessary but a mild five-figure student loan debt can lead the unaware into a six-figure shortfall later on."

Summing Up

Let's all be good fathers and encourage the youngsters to minimize debt, get an education and then save and invest regularly for the distant future, which we oldsters now know isn't all that distant.

Taking care of our future selves is essential to a life well lived.

That's my take on this "Happy Father's Day."

Thanks. Bob.