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This “rule of 72” may inspire you to save more
The truism “it takes money to make money” applies to many situations. Fortunately, when it comes to building a nest egg, I find that all it takes is a little money early on to potentially make a lot of money in retirement. As a financial consultant managing other consultants out in the field, I like to demonstrate this principle in a more precise—and compelling—fashion, with one simple mathematical equation that Iʼll share with you.
72: Itʼs all in the math!
In my years of meeting one-on-one with TIAA participants, Iʼve found that basic math works better than emotional discussions in motivating people to save more money. And nothing demonstrates the power of compound interest more elegantly than the numbers 7 and 2—especially to savers with plenty of time on their side. Hereʼs how…
1) First, the rule of 72 states that an investment with an average annual return rate of 7.2% is set to double every 10 years. Thatʼs right! Double.
Here’s a rule of 72 example: If 20-year-old Sarah invested $1,000 today and just left it there until she retired at age 70, she could end up with something like $32,000. A 32x increase! Based on the historical, long-term returns of US large-cap stocks, the assumption of 7.2% growth is very reasonable (of course, as always, past performance is no predictor of future returns). If Sarah waited until age 30 before investing that $1,000, she would only end up with half the amount of money ($16,000 instead of $32,000) at age 70. Thatʼs why my financial consultants strive to educate those with retirement goals (and to reform lapsed savers) as early as possible— whatever excuses are thrown our way.
2) Similarly, if you assume a 10% rate of return, you double your money every 7.2 years.
Meaning, at age 70, Sarahʼs balance would look more like $128,000! A 128x increase is counterintuitive to the point of being mind-boggling. But if you leave money by itself for long enough, it really can start multiplying exponentially. Historically (that is, 1928 through 2014), the annual average return rate for the S&P 500 has been 10%. If you factored in reinvested dividends over that period, the figure would be even higher. Of course, if you break down this timespan into shorter periods, there is some variation: For example, the average annualized return for the three-year period, 2013-2015, was 15.13%; other periods experienced much lower averages.
On the flip side, the rule of 72 applies to credit card debt
Just like the accelerated growth on your savings, the same thing can happen—in the opposite direction—when your debts compound. And credit card providers usually charge interest rates higher than 10%, meaning those institutions are making money off of you at a faster rate. But for the sake of this argument, letʼs suppose Sarahʼs more feckless twin sister, Julie, owes $1,000 and the rate is 10%. If she avoided repayments for 7.2 years, she would double her debt! Of course, few are so irresponsible as to throw seven yearsʼ worth of credit card statements, unopened, into the trash. I use this extreme example to better show how compounding can work against you; the sooner you pay off your debt, the lower the total cost to you. Just as I like to inspire savers with the rule of 72, I find it handy to discourage would-be borrowers as well. The $1,000 shopping spree (at a borrowing rate of 10 to 18%) is costing a lot more than the original $1,000 price tag. Remember that the next time a “must-buy” designer bargain has you reaching for your plastic! Understanding the rule of 72 (really a math equation) can help you quickly understand both the potential benefit of saving early—and the cost of buying on credit. Whether you are still quite early or well into your career, there may be no better time than the present to invest in your retirement.
Five essential estate planning questions to ask
Taking time to do your estate plan now can benefit the ones you love later.
We all hope to leave something behind after we’re gone. For some people, that takes the form of leaving an inheritance for family, money for a grandchild’s college education, a legacy for a favorite cause or even some sentimental items for friends. For others, it’s simply trying to minimize the challenges—financial and emotional—facing those loved ones. One of the biggest benefits of having an estate plan is knowing you’ve done what you can to make things easier for them.
Pondering your own incapacity or mortality, and what might happen to your loved ones when you are no longer with them, can be tough to face. It’s what keeps most people from starting the estate planning process, but taking this step now—and regularly reviewing your estate planning documents after you’ve crafted them—can provide confidence for you and your loved ones that your wishes will be carried out.
Here are five estate planning questions to help you get going:
1. Who makes decisions if I can't?
If you become incapacitated and can’t make decisions for yourself, who will make them for you? Who will manage your assets? It’s hard to imagine putting that burden on your loved ones’ shoulders in such a challenging situation, which is why you should spell out your thoughts in a durable power of attorney, a healthcare proxy and a living will. If you don’t have these documents, your loved ones would have to petition the courts for guardianship or conservatorship, and that would be on top of worrying about your health.
Here are the basics:
- A living will gives you the opportunity to say which medical treatments you would or would not want to receive if you couldn’t make your own choices.
- A healthcare proxy lets you put someone in charge of making healthcare decisions on your behalf.
- A general durable power of attorney designates someone to manage your day-to-day financial and legal affairs. This person can be authorized to receive income, write checks, pay expenses, file your income taxes and more.
“Before choosing the people in these roles, consider all the things that they would be responsible for,” says Daniel Soo, a senior wealth management advisor with TIAA. “Think carefully about whether they have the time and the expertise to handle them. It also helps to have a trusted advisor, like TIAA, to provide support along the way.”
2. Who gets my savings and possessions?
Think about the things you have to share—whether it’s money you’ve saved, your home or heirlooms you’ve collected. Passing those on to others can have an emotional, as well as a material, effect on their lives. Estate planning provides a way to make sure your possessions are shared the way you intended.
- Your will is typically the primary component of your estate planning documents, outlining your general wishes, and the executor is the person who carries them out. So it’s important to choose an executor for your estate.
- Not all assets get transferred through a will. Life insurance and retirement accounts are typically passed through the beneficiary designations on those accounts.
- Similarly, property that you own jointly typically passes to the surviving owner.
- If you have transferred assets to a trust during your lifetime—either revocable or irrevocable—those assets will not pass under your will but will pass per the terms of your trust.
Keeping all of your estate planning documents updated—including your will, beneficiary designations and titles of large assets—and having a plan to control, manage and protect your assets are important steps to take to make sure that the people you want to receive benefits actually do.
What happens if you pass away without having done any estate planning?
“In that case, the laws of your state will decide who inherits your property,” Soo says. “It will likely go to your next of kin, which could be your spouse, a parent, a child or a sibling. This will be an emotional time for your loved ones. There could be differences of opinion unless you’ve made your wishes clear. Talk to your loved ones about the choices you’re making so they will understand the reasons behind them.”
The power of compounding interest
by Melanie Simons
Melanie Simons is a Wealth Management Director and Certified Financial Planner at TIAA. When Melanie is not helping those in need of financial guidance, she is hiking the Appalachian Trail. You can follow her Twitter account at @melaniesimons.
The sooner you start saving and investing for retirement or any other goal, the more time you’ll have to take advantage of the power of compounding. And compounding is simply too good to put off.
What is a compounding investment?
Compounding happens when earnings on your savings are reinvested to generate their own earnings, which in turn are reinvested to create more earnings, and so on. Over time, compounding can add a lot of fuel to the growth of your savings.
Getting an early start on savings can pay off in a big way. Let’s look at Kate and Andy, both saving and investing for retirement.
Each saves $30,000 over 20 years—$1,000 annually for the first 10 years, and $2,000 annually for the second 10 years, with contributions made at year-end. Each achieves a hypothetical 6% annual investment return. Kate starts saving at age 25 and stops at 44. Andy starts at 45 and stops at 64. Look at how much Kate and Andy have in their respective retirement nest eggs by age 65:
Although Kate and Andy both save the same total amount and earn a 6% return on their savings, Kate ends up with over $110,000 more in retirement savings than Andy. Why? Because her money enjoys up to 40 years of growth from the power of compounding, compared to up to 20 years for Andy’s money. Since Andy starts saving later, he would need to save more than three times as much money as Kate to end up with the same size nest egg at age 65.
How to save money on a child's wedding
By Alicia Waltenberger
Alicia Waltenberger is Director of Wealth Planning Strategies at TIAA, specializing in estate planning. You can learn more about planning for your beneficiaries on her blog.
Your child’s dream wedding doesn’t have to be at the expense of your retirement savings. Here are tips on how to save money on a wedding.
Your child’s wedding is cause for celebration—and a little trepidation if you intend to help plan and pay for the day.
As excited as you are to celebrate your child’s union, planning a wedding can be hard work and a lot of money: The average cost is $33,391.1 When figuring out how to budget for a wedding pops up at the same time you’re ramping up your retirement savings, how can you stay on track?
These tips will teach you how to save money on a wedding so you can give away the bride or groom without giving away your future.
1. Set expectations early
Whether you’re the parents of the bride or groom, before any contracts are signed, sit down and talk with the couple about how much you can realistically spend for their big day.
- Explain how your other financial obligations (e.g., retirement) helped you arrive at that number.
- Identify the couple’s top priorities—like a breathtaking venue, foodie-worthy menu, or top-caliber entertainment—and how to save money on a wedding overall so the budget can best be used to achieve those priorities.
2. Don’t make financial decisions based on tradition
No, the couple isn’t obligated to host a catered brunch the day after the wedding for family and out-of-town guests just because your cousin did. (How many newlyweds would rather sleep in and not be hosts, anyway?)
Similarly, the bride’s family is not obligated to pay for the entire wedding. That tradition has been fading for decades. More typical today is everyone paying a part of the overall wedding budget. On average the bride’s parents contribute 44% of the wedding budget, the couple contributes 43%, and the groom’s parents give 13%, according to The Knot.2 This could also be a great time to engage the happy couple in a conversation about saving and budgeting for what will matter to them down the road—and how saving money on a wedding can help them get started.
3. Never borrow from your retirement plan for a wedding
Keep your hand out of your retirement cookie jar. If you’re asking yourself, “Should I borrow from my retirement account or reduce the contributions I make from my paycheck?” remember that those diverted funds would lose the earning power that you’re counting on to fund your retirement. Withdrawing money early may increase your taxes and result in penalties.
Instead, ask vendors about granting discounts for booking early or paying cash. It’s a great way to save money on a wedding.
You can also get creative with bartering. For example, if you’re a CPA, perhaps you can agree to prepare the florist’s tax return in exchange for wedding flowers. That way, everything comes up roses for both parties.
4. Look for small cost-cutting measures within your control
Work with the couple on how to save money on the wedding, from flowers to invitations. Here are some ideas to get you started:
- Would guests care if there’s an appetizer buffet instead of passed hors d’oeuvres?
- Is the DJ’s lighting package worth the extra money?
- Do you need fresh floral centerpieces, or could you fashion a cheaper, yet striking, alternative like a bowl of lemons?
Guests won’t notice what’s not there, so zero in on the important features that are fixtures in both your budget and the couple’s picture of their perfect day.