BRIGHT FUTURE

Mike is under twenty-five and sitting on a $50,000 retirement nest egg

MIKE ZACCARDI WAS AN EIGHTEEN-YEAR-OLD high school senior when he heard me speak about one of my favorite financial tools, the Roth IRA, and he really liked what he heard.

He heard me describe how a Roth allows you to save money for retirement with the money growing tax-free, not tax-deferred like a regular IRA or 401(k). And you can withdraw the money in retirement without paying state and federal income taxes on the amount you take out.

The Roth doesn’t give contributors an income tax deduction like the other plans do, but teenagers typically don’t earn enough to need deductions.

Mike worked after school and on the weekends at a golf course driving a golf ball picker. It was a minimum-wage job, but he was earning an income. He took home about $120 a week from the golf course and another $80 a week at his other job at Publix, a popular Southeastern grocery chain.

Scraping up the $3,000 he would need to open a Roth at a particular low-cost mutual fund company would be tough, but Mike was able to meet his self-imposed challenge by the end of the year after tithing, paying for gas for his car, and other odds and ends. (He didn’t realize at the time that he had until April 15 to make a deposit for the previous tax year.)

That was in 2005. After making the maximum Roth deposits of $4,000 in 2006 and in 2007, and $5,000 a year after the limit on contributions was raised, Mike Zaccardi, now all of twenty-four years old, has a retirement account worth $50,000!

“My goal is definitely to retire young,” said Mike, who graduated in 2011 from the University of North Florida in Jacksonville. “The Roth is just one piece of the puzzle, but an important piece.”

Mike doesn’t really have a particular sum in mind for his retirement nest egg, because inflation can change the amount he might need. “But certainly at least $2 million discounted to today’s dollars.”

He’s definitely on track. Even if he never contributed another dollar to his Roth IRA, the twenty-four-year-old, like most investors, could expect to see his money roughly double every eight years, to $100,000 at age thirty-two, $200,000 at age forty, $400,000 at age forty-eight, $800,000 at age fifty-six, and $1.6 million at age sixty-four.

But Mike, of course, isn’t finished saving. With his double major in investment finance and financial services and planning, and a minor in economics, he got a job with a major brokerage/mutual fund company.

He was planning to put the maximum into his Roth 401(k) when I spoke to him, and plans to save a large percentage of his income going forward. Wow!

I asked Mike if it’s ever been challenging for him to be such a good saver.

“I have found I am a bit strange in that I find joy in saving money,” he said. “I think I get the same thrill about saving as others get about buying a new car, iPod, or surfboard. It has not been very difficult, but it has required working my butt off at times.”

Mike also made some smart, frugal choices about his college education. He chose to attend college near his home in Jacksonville and to live at home, only a few miles from campus. That allowed him to save more and to work more, as there are more opportunities in Jacksonville than he would have expected to find in a college town.

Being in Florida, he also benefited from the Florida Bright Futures scholarship program. He had some tuition to pay that wasn’t covered by the program, but Publix supermarkets had a tuition reimbursement program that took care of that. So he graduated from college with no student loans.

“Speaking of college, I never paid full price for a rip-off college textbook!” Mike said. “I would typically buy a used book that was an older edition for literally pennies on the dollar of the new current edition book. In fact, I probably profited from selling my textbooks in my final couple of years.”

Mike has also been very careful with credit cards, another source of financial trouble for many young people.

Following my advice when he was in college, he opened a credit card account just to establish a credit history and to begin building it. It had a $250 credit limit and he used it only to pay for an occasional small purchase, and then he immediately paid it off. He now has eight credit cards and never uses more than 20 percent of his available credit limit to keep his credit score high. (Your credit rating suffers if you use too much of your available credit.)

Mike uses the cards mainly to take advantage of cash-back rewards, and he pays each off every month so he doesn’t incur interest charges or accumulate debt.

He has this advice for kids and students in particular who want to save for their future: Get a job.

“I started making minimum wage and made it a point to save money where I could.”

A Roth IRA is a great way to do it, he said, because you can withdraw your contributions—not the earnings on the money, just your contributions—at any time, tax- and penalty-free.

“I understand not all students may have the drive to save as much as me, but if they were to simply look at what $1 today can grow to over the decades, I believe they would be amazed at the power of compound growth! At a minimum, students need to save for college—do not depend entirely on student loans.”

He also thinks parents who can afford it should help their working children contribute to a Roth. If a teen works and earns $5,000, then the parents can contribute up to $5,000 to the child’s Roth IRA account for them. Or the parents can contribute $2,500 and the child $2,500. The student probably can’t put every cent he earns into a Roth, but the parents can help, as long as the student has earned income. I often encourage parents to match their child’s contribution to a Roth, which doubles the child’s saving power.

What other tips can you draw from Mike’s remarkable savings efforts?

Start saving early.

• A fifteen-year-old who saves $2,000 each summer for seven years and lets the money grow in a retirement account until sixty-five can easily amass $1 million or more. That’s without ever contributing another penny after twenty-one!
• I know that’s a big claim, but it was recently corroborated by Chicago Tribune financial columnist Gail MarksJarvis. (Her exact figures require a sixteen-year-old to save $2,000 annually for six years and retire at sixty-nine, not sixty-five.)
• Gail’s numbers assume a 9.4 percent average gain annually, the average return on the stock market since 1926—in spite of all the ups and downs of the 1930s Great Depression and all the bear markets of the modern era.
• Of course, inflation will greatly eat away at the purchasing power of $1 million when your fifteen-year-old retires, but I want to suggest that it can be easy to build some level of comfort and security into your later life if you just start saving early! Most people don’t start thinking about saving until they hit forty. Begin early and it can make a big difference down the road.

Invest equal amounts of money on a set schedule.

• My goal is to have you automatically put in a set amount of money regularly to build the habit of saving and reduce your overall risk to market ups and downs.
• By making regular contributions each month or each pay period in equal amounts, you are doing what’s called “dollar cost averaging.” That’s just a fancy way of saying that you’re pacing your investing against the market. With the same dollars each month, you’re buying more shares when prices are low and fewer when they’re high.
• Over time, saving money in this way—rather than all at once in big lump sums—reduces the possibility of panic and keeps you steady as you go. And staying in the game makes you more money over the long haul.

Diversify your portfolio.

• Spreading your money out among both domestic and international investments is one of the safest ways I know to invest.
• I recommend mutual and index funds over individual stocks. Pick four or five mutual funds for your portfolio with at least one being an international fund. When you’re younger, you want more stocks and fewer bonds in your portfolio so your money has the optimal time to grow. As you age, you can do the reverse with more bonds and fewer stocks.

Do discount investing.

• A couple of years ago, Los Angeles Times financial columnist Kathy Kristof reported on findings that the typical investor who makes an annual $4,000 contribution into an IRA can lose 54 percent in fees alone each year.
• There are three fees most commonly associated with commissioned investments: the “load,” which is the commission itself; 12b-1 fees, a dubious marketing charge that pays for advertising to attract more money to the fund; and an annual management fee, which should always be lower than .5 percent.
• The takeaway here is simple: Don’t buy your investments through full-commission brokerage houses or an insurance agent. Instead, buy your investments commission-free (aka “no load”) through discount brokers that hold down the other expenses too. Vanguard, Fidelity, and T. Rowe Price all do a great job of this.