What’s harder than getting your clients who are reluctant to save to have the discipline to regularly contribute to their investment portfolio? Try explaining the benefits of compounding and the potential benefits of delayed gratification to this same group of low savers.
It seems that many of my five children enjoy drinking coffee. Not just any old cup of joe, mind you, but a premium cup of java from one of those famous coffee chains. Just hearing them place their orders sounds as if they’re speaking in a foreign language. These cups of fancy coffee can cost upward of $5 or more. Meanwhile, I calculate my standard cup of home-brewed coffee costs about 10 cents.
How much is that special brew really worth?
Sometimes when we’re making the drive to the coffee shop, I’ll try to get them to think about the possibilities were they to save their money and buy a lower-priced version or—heaven forbid—try a cup of their dad’s home brew. As you can see in the graphic below, that special cup of coffee really adds up over time.
Compounding: One cup of coffee at a time
* Source: Ashley Rodriguez, 2016. The average cost of coffee in your city. Accessed May 1, 2017, at http://www.baristamagazine.com/average-cost-coffee/.
** Invested in a low-cost, diversified Roth IRA. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a Roth IRA are tax-free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.
This hypothetical illustration does not represent the return on any particular investment and the rate is not guaranteed.
By pocketing the $3.50 for coffee each day and investing it instead in a low-cost, diversified Roth IRA, you’d have an estimated $106,000 after 30 years. I don’t think anyone would pay $106,000 for coffee! I know Warren Buffett certainly wouldn’t.
As a young man, Buffett wondered if he really wanted to spend $300,000 for a haircut.1 By getting his locks trimmed every five weeks instead of four, and spending $18 instead of $25, Buffett estimated he’d save an estimated $300,000 over his lifetime.
A few bucks here, a few bucks there … can pay big over the long term
The bottom line is, small changes in financial behavior can have big consequences over time. Getting clients to increase their annual retirement savings contributions by as little as 1 percentage point can have a huge impact.
It’s smart decisions like these that can make the difference down the road, so clients can buy that sports car, take that trip to Europe they’ve long dreamed about, or even retire a few years earlier than they had planned. And it’s not just about investing a little more early on. It’s also about counseling your clients not to wait until the last minute during the course of a year to invest.
By Fran Kinniry of Vanguard, read the full article here.