Friday, April 13, 2007

Good Geeky Compounding Fun: When a 14 Year Old Can Surpass a 45 Year Old

Let's ponder for a bit.

Many financial analysts use the 25 year old vs. 35 year old example to show that starting early trumps trying to play catch up. Fair enough. It's an impressive example.

But I wanted to go one further: What about starting really early? If I can install saving and investing in my boys when they are early teens, how will that impact their retirement (or other) savings?

Naturally, I whipped out Excel to help me out.

Let's take a 14 year old boy who is fairly lazy, but mows lawns for an entire summer due to the overwhelming mathematical brilliance of his sainted Father, then socks $3,000 away in a Roth IRA. He plans to start taking withdrawals at age 65.

When this boy turns 45, a friend of his decides it's time to start saving for retirement. He puts away $3,000 a year, every year, from age 45 until he retires at age 65.

To make this easy, let's assume they both earn 8% per year, every year, on all invested monies.

Who had more moolah when they turned 65? (You can see this coming a mile away, can't you Dear Reader?)

14 year old boy who invested 1 year @ $3,000: $103,422 (total invested: $3,000)
45 year old who invested for 21 years @ $3,000: $ 90,973 (total invested: $63,000)

Now imagine the delta if the boy invested $3,000 a year for 5 years (ages 14 - 18).

He would have $445,970. Amazing.

So if your kids want to be rich, show them this... then show them where you keep the lawn mower and the gas can.

No comments: