You know you have done something right as a parent when your child comes to you for advice on how to invest his or her own hard earned money. You smile proudly when asked: What should I buy? or How should I do it? But how should you, the parent, respond? A recent experience with a client and his son could be a helpful guide if you find yourself being asked that wonderful question.
Real situation, names changed….
Jim had saved several thousand dollars already by the time he was a junior in college. Living below his means on campus and working jobs when he could meant he was accumulating money steadily. This was one motivated kid, I mean, adult. Smart too. He wanted to get a head start on investing, as he prepared for life after graduation. Jim’s father arranged for Jim and I to have coffee together to discuss investing and how to get started.
Already ahead of the game
As we sat down over coffee on a pleasant day in Post Office Square. Jim didn’t realize that he was already 2/3 of the way there towards a successful lifetime of investing.
The first step, I told him, is to save. The second is to invest. These two sound so obvious, but still Jim was already way ahead of most of his peers with his $3000 savings as a twenty year-old.
The third factor, I described, is to invest successfully, which I define as achieving a long term rate of return consistent with one’s goals. The return could be high or low, depending on risk, and has nothing to do with “beating markets.” Different asset classes offer a wide range of expected returns and it’s up to the individual to understand what level of risk they are willing to assume to get those returns.
Let’s put a number on it
I asked Jim how much money he wanted when he retired at age 65. To his credit, he was able to conceive of some time eons into the future when he would retire. He told me $500,000. “Put another zero on it,” I suggested. He looked pretty surprised. “I’ll show you how.”
I then gave him some homework. I asked Jim to build an Excel spreadsheet showing his earnings for the next 43 years and his percentage saved. I gave him a few assumptions, like the average starting salary after college and the average salary increase over time. Then, not to make it too fantastic, I told him to cap his compensation after 15 years and keep it flat for remaining years.
What rate of return would he need to accumulate $5 million by age 65? How much would he need to stash away?
An A+ on homework
If you’d like to see what Jim came up with, email me and I’ll send you his spreadsheet. It’s a thing of beauty, and a great learning tool for anyone just getting started in the investment realm, regardless of age.
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