Question Of The Month –March  2010

          Are You a Procrastinator?

Procrastination:  to put off; to delay taking actions until later.

I am sure that you know someone who does not participate --- contribute to their 401(k) plan at work.  One survey found that almost one out of every two  ---forty four percent of all employed adults reported that they do not participate in their 401(k) plan.

The problem as Walter Updegrave, senior editor at Money magazine points out is that this group may end up paying what he refers to as The Price Of Procrastination.  What is that, you ask?  Basically it’s the potential amount of retirement savings you miss out on by failing to get an early start building your nest egg.  And if you think delaying doesn’t carry a high price tag, consider this example.

Let’s look at Larry, Mary and Terry.  Larry started investing $100 a month at age 20.  Mary started investing $100 a month at age 25.   Terry, a true procrastinator, was always waiting for the “right time”.  He started investing at the age of 35.  Assuming a 9% of return on their investments and their desire to retire at age 65, how much will each have if they continue investing $100 a month until they retire? 

Larry ended up with $740,000 ---Mary with $468,000 and Terry with $294,000.  Waiting five years to start investing cost Mary $272,355 and waiting ten years to start investing cost Terry a total of $446,309.  That is almost a half a million dollars--- the real cost of procrastination. 

You might be a Mary or a Terry---looking for the right time to start investing.  The only “right time” to start investing is today.  Putting off investing for any reason is going to cost you much more in the long run than getting the timing correct. 

Updegrave offers his example.  “Let’s say that you earn $50,000 and that your salary will climb at an annual rate of 2.5% during your career.  And let’s further assume that you take my advice and begin contributing, say, 10% of your salary to your 401(k) starting now, and that you continue on that course until you retire at age 65.  Assuming a reasonable 7% annual return, you would end up with a 401(k) balance come retirement of just under $680,000.  No enough to fund a lavish retirement ---remember this is $680,000 in 2041 dollars---but still a tidy sum.”

But what happens if you procrastinate and get a later start?

Updegrave says that if you wait just six years until you're 40 to join your 401(k) and then follow the regimen described above, you would end up with about $475,000 at age 65, or 30% less than had you started at 34. That makes the Price of Procrastination $205,000.

What is you hold off participating until you're 45?  You would end up with roughly $335,000, which is less than half what you would have by starting now. The Price of Procrastination in this case: $345,000.

Just suppose you really dawdle and don't get around to joining your 401(k) until you hit 50.  Updegrave says “You would accumulate just under $225,000, a haircut of about two-thirds of what you might have by starting today. Your "POP": about $455,000, or nearly half a million bucks.” 

Sure you can say that all these figures are hypothetical.  You may not be able to contribute 10% every year. And you're certainly not going to earn 7%, or any other return, year in and year out without fail. So in the real world, your account balances will differ .

Updegrave says that when you delay, you don't have those early contributions working for you all those years. And the more you delay, the more stunted your nest egg is likely to be.  Some of course will say okay, I may get a late start, but I'll make up for it by contributing more later on or by earning a higher rate of return on my 401(k) investments.  Updegrave says that's a lot easier said than done.

“For example, by delaying to age 45, you would need to contribute about 20% of salary each year to wind up with the same nest egg at 65 that you would have had by starting at 34, assuming the same 7% return. Wait until you're 50, and you've got to sock away about 30% of salary to compensate for the late start.”

Some will say that their investment returns are going to dig them out of the hole.  Updegrave says you should rethink that strategy.  “Assuming you don't get going until you're 45 and then contribute 10% annually, you would have to earn more than 13% a year to hit age 65 with the same $680,000 nest egg you would have had by beginning at 34.”

Updegrave says that if you postpone saving until age 50, you would have to earn in excess of 20% a year to end up with the same balance.  “You would need to have incredible luck or the skills of Warren Buffett to have even a prayer of racking up such returns over so long a time.”

Updegrave also suggests that after you've signed on to your plan and are stashing away a reasonable percentage of your salary, you then might want to begin looking for tax-advantaged ways to save outside your 401(k).  “A traditional deductible IRA, which gives you the benefit of a tax deduction, and a Roth IRA, which provides no deduction but offers tax-free withdrawals later on and also lets you diversify your tax exposure, are the logical candidates, assuming you qualify.”

But don’t lose sight of your main priority.  Updegrave offers this piece of advice.  “The single most important thing you can do to get on the road to a secure retirement is to sign up for your 401(k) now. Every day you delay, the Price of Procrastination goes up.”