Just in time for graduation season, investment adviser and writer William Bernstein has published a financial guide that even members of the YouTube generation may absorb in one sitting. He doesn’t break any new ground. But that’s kind of his point: saving enough for retirement is alarmingly simple—if you start early.
This is a theme that I have been pounding for years and which I come back to as often as seems bearable. It’s that important. Young people may face a poor job market, slow wage growth and mounds of student debt. But they also possess a silver bullet: time. If you start saving with your first paycheck, long-term financial success is all but assured. You’ll achieve what I call Self Security; you won’t need Social Security (even though it will still be around).
Financial planners generally advise saving at least 10% of pay; Bernstein wants them to save 15%. But let’s not quibble. What really matters is that Millennials get started right away and never stop. A critical aspect of this is paying yourself first. That means socking away 10% or so of every check before you even cash it—and living off what remains. Compound growth will do the heavy lifting.
The results over four or five decades are stunning. Say you make $50,000 a year and save 10%, or $5,000, every year in a tax deferred account like an IRA or 401(k) plan that returns 6% a year. Starting at 25 and retiring at 65, you’ll amass $824,000. If you start at 22 and work until 72, you’ll amass more than $1.5 million. This does not account for expenses. But it also does not account for any company match or additional savings that would come with each pay raise. The point is that saving for retirement is all about getting started young enough to benefit from those extra years of compounding just before retiring.
Most people are amazed to learn than if you start with a penny and double it every day you’ll have $10 million in just a month. For most of the month you have very little—just $10,500 after three weeks. But magic occurs the last few days, when a large sum keeps doubling. Saving for retirement is like that too. The extra years at the end—which you earn by starting early—make all the difference.
Bernstein hits on other favorite themes, such as tuning out stock market noise and sticking to your plan. “There are only two kinds of investors,” he writes. “Those who don’t know where the market is headed, and those who don’t know that they don’t know.” His advice: ignore their warnings and attempts to trade in and out of the market, and keep investing in a regimented way.
This echoes a line I have used since writing my first investing column (for USA Today) 22 years ago. It goes like this: There are three steps to becoming a good stock market reporter. First, you know you don’t understand how the market works, and you believe others do. Second, you think you understand how the market works, but you really don’t. Third, you finally understand that you don’t know how the market works, but it’s okay because no one else does either. That’s when they give you a column.
Bernstein has lot more to say about Millennials and what they need to keep it simple and get started, and why they must not delay. I’m on board with all of it—including making small spending sacrifices now (like avoiding brand-name sneakers and fully loaded cable packages) in order to hit your savings goal and make a difference later on, and sticking with low-cost index funds and a simple portfolio that may be nothing more than a single target-date mutual fund.
I’m putting his plainly written 16-page guide on my favorite Millennials’ reading list. It’s free on his website. There’s no YouTube version, but something tells me the kids can handle it.