Periodically, the company that runs the retirement funds at Mr. T’s employer sends out a retirement newsletter. This is the standard single-fold document that tells you to save more money, think about your future, and think about your taxes.
Here’s the Problem:
I read this newsletter religiously (mail about saving more money!? Yes!). It’s terrible. One of my earliest posts rewrote one of Mr. T’s newsletter scenarios because I think someone should jazz this stuff up!
This past newsletter threw in some more horrible stories. I’m changing the names (so I don’t offend the real fictional dummies), but everything else is the same. I’m not making this up!:
At age 25, Betsy begins putting aside $150 per month for retirement. After 10 years she stops contributing, but leaves the money in her account for the next 30 years. Assuming an 8% average annual rate of return, by age 65, Betsy would have amassed $273, 565 which cost only $18,000 in total contributions.
Alright. We get it. The Power of Compounding is real. $18,000 turning into $273,565 is pretty darn good. The bad news? You have to wait 40 years!!! Also, who is this poor woman? $150/month for ten years and then NOTHING?!
Yay Betsy! You have $273,565 (and probably a mortgage!) to carry you through retirement. You’re the poster child of compound interest!
What’s worse? Betsy is the GOOD example!
On the other hand, just as Betsy stops contributing, Bobby begins. He puts aside $150 per month for the next 30 years. At age 65, he has contributed a total of $54,000, yet his account has $40,011 less than Betsy’s.
Oh Bobby! You’re such a fool! Not only did you wait until you were 35 to contribute anything, you only contributed $150/month until 65!
Just one more:
In order to drive the point home, the newsletter gives a low-earning scenario to help demonstrate the power of saving:
A contribution of just 2% from a $25,000 annual salary is just about $10 out of your paycheck every week. If you increase your contribution by just 2% each year until you reach the maximum the company allows, for example 10%, and earn a 6% return on your investments, you would have $321,946 by age 65.
This one at least ratchets the return percentage down to 6%, but assumes that your company is the only place you can invest. Also, $321,946 isn’t great at age 65 either! There is NO REASON (barring disability or other major calamity) you shouldn’t be able to retire with at least DOUBLE that amount if you are working for 40 YEARS!
Also, there’s a disclaimer!
Rates of return may vary. The illustration does not reflect any associated charges, expenses or fees.
Oh man. Who writes this stuff?! So… if there are ANY FEES AT ALL (which, to clarify, is ANY investment… even if you’re going with Vanguard LOW fee funds), Betsy and Bobby will end up with LESS than those amounts!
DON’T BE A FOOL!
Alright dear friends, let’s go over how to NOT be Betsy (or Bobby!) because YOU are smarter than this dumb newsletter:
- Start Early – Betsy’s story shows us that the sooner you start investing, the better. Even if you have debt, don’t stop all contributions to your retirement. You will regret that later.
- Save more than $150! – If $150 is how your monthly savings starts out, fabulous! We know the power of making just one change! But don’t stagnate! Saving only $150/month for 10 years, is NOT good! Don’t settle.
- Consider Possibilities – If you’ve managed to up your contributions each year with raises, etc., excellent work! Remember that you are not limited to your employer accounts. You can invest elsewhere. Open an IRA. Don’t pat yourself on the back for reaching 10% (especially if you want to retire before 65!).
- Don’t stop! – At no point in your working career (especially if your accounts are below $100,000!) should you just think: “Meh. I’m good. I’ve saved for 10 years. I’m over it.”
- Don’t let the fees eat your savings – Personal Capital has an awesome tool that lets you calculate how much your fees will impact your total investments over time. You would be shocked how much of a difference 1% makes! Stick to low fee Vanguard funds as much as possible. Look at the fees in your employer options. Be aware. And go with the low fees.
I’m sure I’m preaching to the choir, but every time I get one of these “scenarios” I start pumping my fist in the air and yelling “THE PEOPLE NEED TO KNOW!”
Also, if you’re looking for a new retirement newsletter writer for your company, look no further. I can come up with awesome names and awesome scenarios! 🙂
As for you, dear readers, don’t be a retirement newsletter example. You’re better than that!