To Save Or Not To Save (When You're Young), That Is The Question

"It has been said that there is no fool like an old fool, except a young fool. But the young fool has first to grow up to be an old fool to realize what a damn fool he was when he was a young fool." 

The above quote from former British Prime Minister, Harold Macmillan (1894-1986), is timeless and dead on. And so is the article below from marketwatch.com that takes to task a millennial on her ideas about why young people should not concern themselves with saving for the future.  See if you agree:

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"George Bernard Shaw famously remarked, “Youth is wasted on the young.” But if he was talking about Lauren Martin, he might have flat-out said it was completely and utterly lost on them. In case you missed it, Martin is the 20-something bad girl who’s riding her 15 minutes of fame for a piece in Elite Daily that makes the case that young people should fritter their money away. Her basic premise is that her cohort has time aplenty to worry about the important stuff—marriage, kids, buying a house, etc. Now is when they should go clubbing, take another three-day weekend and drink all the Frappuccinos you want. To quote her exact words: “When you care about your 401(k), your life is just ‘k.’” 

To which I say: Has anyone ever explained the concept of compounding to Ms. Martin? 

To some extent, I understand where this young woman is coming from. In fact, I lived her life some three decades ago. (I’m now 51.) OK, maybe I didn’t go clubbing, but I spent a lot of money on taxis and take-out. Moreover, I completely ignored saving for retirement. I still remember a conversation with a manager at a bank branch near where I had my first job out of college. I had gone to open a checking account. He asked if I was also interested in opening a retirement account. Like a full-of-himself 20-something — two can play this game, Ms. Martin — I snapped back, “Do I look like I’m worried about retirement?” Needless to say, the conversation ended right there. 

Jump ahead to today and I’m very much worried about retirement — precisely because I didn’t start saving in earnest until a decade or so ago. And I’m hardly alone: Most of my peers are in the same boat and talk about working until they’re at least…well, dead. (Or at least until they’re well into their 70s.) It’s reflective of a national trend. 

Consider: One recent report noted that the average 401(k) balance of baby boomers is around $126,000—or a few hundred thousand short of what most financial experts suggest it should be for a comfortable retirement. And let me be clear: I consider myself one of the lucky ones. I’ve actually amassed a fair bit in the past decade. Plus, I have a small pension from a previous job — something that most of my peers can’t count on (and something that is a complete anathema to Martin’s generation). Oh, and I have an affordable condo that’s fully paid off. I’m not saying this to brag. Just to suggest that if I have some concerns about retirement then Ms. Martin has some HUGE worries ahead of her. 

Still, luck is a relative thing. Because I’m somewhat underfunded on my retirement, I don’t take huge vacations. (Some folks go to Europe. This past summer, I went to Canada.) And I’ve long given up the dream of owning a second home. I realize these are first-world problems, but the subject at hand is how to have fun. And fun, my friends, comes at a price. 

But here’s the thing: Martin can have her fun and have her 401(k), too. The power of compounding is that you really don’t need a whole lot to jump-start your savings. I won’t get into the usual platitudes about how you won’t miss that daily Frappuccino, but let’s just say I’ve never been a fan of Starbucks, anyhow. 

More to the point: When you’re in your 20s, you may think you’re having fun, but let me tell you: It’s sort of an amateur-hour version of fun. That first great beach vacation you take? It will only seem half as great as the next one. And then the next one after that. The same holds true for those restaurants in town. The point is that time teaches you to separate the great from the not-so-great. By the time you’re ready for retirement, you’ve really mastered the art of fun. 

You’ve also learned the most invaluable lesson of all—that fun is actually living in the moment and just doing…nothing. Reading a book. Having a beer with a friend. The stuff that costs you very little — provided, of course, you can cover the necessities, like food and shelter. So, you see, Ms. Martin, I’m okay with just being ‘k. 

But I’m not okay with being foolish about money." 

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Now here's some quick math to support the above rebuttal of Ms. Martin's 'live-it-up young people' argument:

If you started working at age 22 and managed to save and invest $3000 a year for the next 43 years, assuming a 7% annual return, you would end up with $826,000 at age 65.  (Note $3000 times 43 years equals $129,000, not $826,000.  The difference due to the "magic" of compound interest.)

If you partied hard for 10 years and started at age 32 instead, you would have $388,000 at age 65. (Note if you wanted to end up in the same place you would have, had you started 10 years earlier, you'd have to save around $6400/year, or more than double the original annual amount.)

And if your waited until you were 42, when you finally started to see a grey hair or two, you'd have to save around $14,500 a year to end up in the same place as the 22 year old you. Obviously the math suggests you could end up with a whole lot more than $826,000 by starting young and not putting any limits on the amount you saved each year. But that would require you to be mindful of Mr. McMillan's advice and cognizant of the fact that aging and growing up are not necessarily the same thing.



KM