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Graduates fresh out of college have the one thing that's most important for long-term wealth accumulation on their side: time. Take two scenarios, for instance, both assuming retirement age of 65 and a long-term average stock market return of 7% annually. Scenario one: Smart 20-year-old college grad accepts an offer to go work for Big Tech, Consulting, whatever. Their salary allows them to pay down any student loan debt they might have, build a cash cushion, and sock away $10K/year for retirement. At 35, when they've built valuable industry experience and connections, they decide to go out and do their own thing. They stop investing in their retirement account, putting their cash into the startup or raising money, and let the retirement account sit and grow with compound interest.[1] Scenario two: Smart 20-year-old college grad decides against the BigCo route and founds a startup (assuming this is even feasible given any loan debt they might have). Maybe raises a small funding round, takes a low salary...everything goes back into the business. There is no investment into a retirement account. Let's say they meander through startup land up until 35, making some money here, losing some there and given the high failure rate of startups never really sees the "big exit". At 35, when things like marriage and family happen, they're forced to take a job at BigCo (or MediumCo, SmallCo, whatever) and finally have the means to start investing something into a retirement account. Let's get aggressive and say they put in the same $10K/year that scenario 1 grad did up until 65 (hard to do if you start having kids, buy a house, etc). At 65, scenario 1 grad would have $2,046,783 in their retirement account after just 10 years of investing $10K/year and then letting it sit and collect compound interest. Scenario 2 grad would have just $1,010,730 in their retirement account after investing $10K/year over a period of 30 years. The difference between scenarios comes out to over a million dollars! Obviously there's an endless list of variables that could throw a wrench in this model, but the point is that people who fail to assess the time value of money and the opportunity cost for a dollar spent (or not invested) today vs. one invested over the long term do so at their own peril. If you're 20, just $1,000 invested into the market once will turn into $21,000 when you're 65. If you keep putting money in regularly, this amount will grow significantly and the sooner you start the more it will grow. It's up to each individual to determine the right path for them, and I'm not saying it would never make sense to go do a startup when you're young (you have more energy, creativity etc), but you must be aware that the tradeoff is losing valuable years early in your financial path that you will never be able to get back. Arriving at the same spot at 35 that you could have started at at 20 will put you significantly behind others who have used those early years to put the miracle that is compound interest to work for them. [1] http://www.moneychimp.com/calculator/compound_interest_calcu... |
Guess what: you are never going to have financial security unless you win the startup lottery. If you make 150k a year instead of 100k, the colleges you send your kid to will just charge you an extra 50k in tuition. The more you make, the more they charge. Great model, eh?
Middle class savings are ridiculously inadequate to modern expenses. Even a few days in the hospital could set you back hundreds of thousands of dollars if the bureaucrats at the insurance company decide it's not covered. In a divorce your partner will get half of the house, half of the money, and probably a permanent monthly stipend out of you (at least in California).
You're either one of the 1% or you're one of the poor. So take your chances and roll the dice. If you succeed you will be able to pursue whatever other dreams you want. If you fail, you'll just take the safe job at IBM like everyone else. Retirement is mostly a scam anyway and odds are none of the savings you've accumulated will mean squat when the big one drops / singularity hits / Sarah Palin becomes President-for-Life.