Retirement Investor

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Given all the competing demands on people’s money, saving for retirement sometimes gets shorted – especially early in a person’s career. Generally, a college graduate would possibly have student loan obligations, car payments and saving for a house all tugging on their paycheck. This causes many to put retirement savings on the back burner given that it is 40 years away. This is a mistake and current laws encourage this procrastination.

Currently, the IRS allows a “catch-up” provision for those 50 and older to save additional monies for retirement. If there was a better understanding of the impact of time in building wealth they may reconsider the timing of the catch-up provisions. In investing, time and compounding is your best friend – even more than how much you invest. It is thought that Albert Einstein once referred to compounding as the eighth wonder of the world and he was on to something. If I were to invest $1,000 when I was 25 to save for my planned retirement at 65 and could earn 8% on average that would turn into about $21,725. If I waited to invest that same $1,000 until I was 30 for my retirement at 65 the same 8% return would only grow to $14,785 – a loss of $6,940 (almost 33%) by waiting only five years out of the 40. Saying it another way, I would need to invest $1,470 at 30 to reach the same $21,725 at age 65 – nearly 50% more!

The IRS catch-up provision, as it currently exists, robs investors of years of compounding. If we look at your IRA contribution limits we can see how dramatic this impact is on our savings. Currently, we are allowed a $6,000 contribution to an IRA annually (Roth or traditional) and then an extra $1,000 for 50 and beyond. If we look at a current 25-year-old who is just starting out in their first job who is planning to contribute the maximum (within income limits) to their IRA and invests to earn an average of 8% per year as a return, what would they have when they turned 65? Under current rules, they would make 41 contributions – 25 at $6,000 and 16 at $7,000 for a total gross contribution of $262,000. At age 65 they would expect to have about $1,715,000 as their retirement balance – certainly a great start to their retirement. If, however, the “catch-up” were allowed in the first 16 payments instead – call it a “head-start” instead of a “catch-up” – the same $262,000 over 41 contributions would instead be worth $1,892,000 – a balance that is $177,000 (more than 10%) greater. This is with no change in total invested, retirement date or average annual return – just in the timing of the extra $1,000. Why is this – because a greater balance can compound for more periods. 

This difference is even greater with the 401(k) contribution limits. Under present law, one has the opportunity to defer $19,500 per year in a 401(k) with a catch-up provision of another $6,500 (for a total of $26,000) each year once the investor reaches age 50. If one maximized the contributions each year of work from 25 to 65 the under current law the total contributions would be just over $900,000 but the balance (assuming an 8% average return over the 40 years) would be about $5,670,000 at retirement. If we took the same total of $900,000 in contributions and just flipped “catch-up” to “head-start” then the same contributions at the same rate would total $6,825,000 at age 65. This is an incredible $1,155,000 more money for retirement or 20% more just for changing the timing of contributions.

So, what is the takeaway? There are two – first, save as much as you can as early as you can. Second, work on educating your local congressman in the hopes that they incorporate the “head-start” as part of the new retirement proposed legislation. This would go far to helping people who are responsible for a significant portion of their own retirement.

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Steven Gattuso

Steve joined Courier Capital in 2012 from his previous position at the Wilmington Trust division of M&T Bank where he managed portfolios for Trusts, Estates and High Net Worth Individuals. In his current role, Steve serves as the chief investment officer and senior portfolio manager at Courier Capital.

Steve’s more than 25 years of investment experience also include portfolio management at Empire of America and financial management for the General Motors Corporation. Steve is also an Assistant Professor for the College of Business at Canisius College where he is the Executive Director of the Golden Griffin Fund.

Steve earned a BA in Economics and Computer Science as well as his MBA in Finance from Canisius College. He is a CFA charter holder (Chartered Financial Analyst) and he has attained the Certified Financial Planner (CFP) and Certified Management Accountant (CMA) designations. He has been on the Board of the CFA Society of Buffalo for the past several years and is a past President. Currently, he is the President’s Council Representative for CFA Institute covering all of the societies in the U.S. Northeast. He is also a member of the Financial Planning Association of WNY. His community activities include Frank Lloyd Wright’s Darwin Martin House, coaching premier level soccer and he is on the Advisory Board for the Clarence Academy of Finance.

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