How To Retire From A Summer Job
Retirement and retirement planning are commonly considered to be problems for later in life, however, the sooner retirement planning starts the better. Retirement planning is one of those things where the longer you put it off the harder it is to deal with once you get to it. By the same token the earlier you start planning the easier the process will become. Many people put off funding their retirement accounts (Roth IRA, 401k, etc.) so they can buy something more appealing at the present time. For example, a new television or even a car depending on how much they have to contribute. This often puts them in a worse financial situation.
So don’t wait. In fact, if you are a student working now, even your summer job can get you off to a great start. Why? Because you have time on your side.
Let’s take a look at three possibilities based on saving and investing your summer job earnings. The numbers used are three different amounts that are possible to make in a summer and the total a composite of five summers starting at age 14 through age 18 (working in high school and college, for example). All of these plans are invested annually and with a projected average return of ten percent per year until retirement at the age of 65.
Plan 1 maximizes earning and saving from your summer job, this entails earning, saving, and investing $5,000 per summer which means the total amount invested is $25,000. This investment with no additional investment through retirement (except for reinvested dividends) would be worth $2,692,272 at the age of sixty-five. This would mean using the four percent rule that you could live off $107,000 a year for the rest of your life. This plan is the most out of pocket in high school summer job years, however, it commands the best returns and all with no additional investment.
The next, Plan 2, is based on saving and investing $4,000 a year for five years again with no money added after that point. This ends up being $2,153,817.00 which would mean living off just over $86,000 a year. The “$4,000 Summer Job Plan” leaves you with the least retirement funding, however, it also has the least total amount added of all the plans presented here.
Plan 3 is the most complicated, and its results lie between the previous two. Plan 3 requires $3,000 annually invested for five summer job years, the least of the plans presented here. At this point the headwind of the lower initial savings and investment is revealed after the initial five summer job years. To catch up from a lower starting point, the person using Plan 3 invests an additional $1,000 annually until the age of sixty-five at which point you retire. This extra amount shows the catchup that you need to play to make up for investing less at a younger age. The amount ends up being $2,487,338.00 which would allow you to live off $99,000 annually. However, in order to achieve this catchup, an investor uses 47 years of annual $1,000 investments ($47,000) to make up the difference of much smaller possible savings in their summer job years.
The most interesting piece of the comparison is that the plan with the highest end value is Plan 1 which has the second-lowest investment($25,000) and the lowest end value, Plan 2, has the lowest investment but only by $5,000(its total is $20,000). Finally in the middle with the highest overall investment is Plan 3 the “$3,000 Plan” where the lack of initial funding is made up during the rest of your life which means the overall investment costs $62,000. This I believe strongly articulates the importance of time in the market being more valuable than timing the market and even more valuable than the amount invested.
Many young people especially in their teens would rather relax and either not have a summer job or spend the money they make on something they can enjoy there and then. If you are part of the group that would rather have the summer to relax then there are a lot of places you can work at either after school or on weekends. Getting one of these jobs in this particular pandemic summer, depending on where you live, can be harder, however in most places, it is still possible.
Without savings, there is no investment. The problem of wanting to blow your money on something you can enjoy in your teens is a different hurdle. I think the best way to approach this is through a relatively well-known saying, “Why would you spend money on something you don’t want to impress people you don’t like”. That quote gets to the root of the problem in a lot of cases and can help people to rethink their financial decisions.
I recommend thinking about how much this money will be worth in twenty years or even fifty years if you save it instead of spending it. Then ask yourself if what you would like to buy today is worth that much versus what the money can grow to if you save and invest it. If your answer is yes then go ahead because I believe the key to financial minimalism is to spend money where it adds value to you not just simply never spending money.
Most readers are probably asking “why doesn’t everyone do this?” The reason is that most people even some investors, can’t fully wrap their minds around the idea of compounding or at least don’t understand its power. That is why the simple act of doing the math is so helpful. Another reason most people don’t utilize this strategy is that they are not only not thinking ahead about retirement plans and also would rather spend the money on other things today rather than save for tomorrow. As Plan 3 shows though, this adds a lot of catchup costs down the road.
Present and future tradeoffs are all individual decisions, there is no one best method for everyone. However, if you just look at the numbers, the best method for long-run retirement returns is investing as much money as possible as soon as possible. This puts the compounding wind at your back. Many people don’t reap the rewards of all their financial opportunities when they are young because this is not their focus. And almost no one probably thinks they can retire (eventually) from their summer job earnings. However, with a bit of research and planning as early as possible this approach can yield high returns. As Warren Buffett has said, “The stock market is designed to transfer money from the active to the patient.”
Twitter - @soreninvesting
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