I'm old enough now to occasionally grumble about "young people these days." I see them driving around with expensive wheels on their cars and shopping for costly big-screen TVs. I think about how much money they'd have for retirement if they'd just save and invest that money, instead of spending it.
Imagine that you're 25, you invest $5,000, and it grows at the market's historic average rate of 10% for 40 years. By retirement at age 65, that single investment will have grown to more than $226,000. It's easy to see how just a few not-extravagant investments while you're young can make a massive difference in retirement.
The situation is worse than I suspected, though. According to the results of a 2007 CCH CompleteTax survey, while three in 10 taxpayers overall are funding a 2006 traditional or Roth IRA, only 19% of those aged 18-24 are doing so. In fact, fully 57% of young taxpayers don't even know whether they qualify for such accounts.
Let's revisit that $226,000, shall we? Because if it was invested in a Roth IRA, it can all be withdrawn in retirement, tax-free! That's a big deal, and an opportunity that can most benefit young people.
Learn to invest
Better still, young people who put in a little time learning about investing could earn 10% or more per year on average. A simple S&P 500 index fund, for example, can inexpensively invest them in 500 of America's biggest companies, offering roughly the market's overall return.
But if they take the time to find some top-notch mutual funds, they might do even better. The CGM Focus (CGMFX) fund, for example, sports a 10-year average annual return of nearly 25%, along with no load, a reasonable expense rate of 1.02%, and top holdings that recently included Mosaic
If you could earn 14% annually, on average, on a $5,000 investment over 40 years, it would grow to nearly $1 million. And again, in a Roth IRA, it'd all be tax-free.
That's too much for any investor to pass up. Hopefully, young adults will get the message before they squander their most valuable investing years.