Newsletter Introduction

By Chris Cassidy

FROM THE TIME I WAS SIXTEEN until the time I graduated from college, I had several different jobs. I mowed lawns, and worked for a sprinkler pipe company, an organic foods farm, a mason and a law firm. In college, I worked in the advancement services office doing data entry and maintaining files. These were all great work experiences, and I do not regret any of them, but I do regret not taking advantage of retirement savings during this time in my life.

It was not until I started working at Trust Company of Vermont that I began contributing to a Roth IRA. Now that I know the benefits of the Roth IRA, I am going to make sure I set one up for my daughter whenever she has W2 earnings. Currently, she is only four years old, and while adorable, she is not yet employable.

However, many of our clients do have children or grandchildren that are working in high school, college or recently in a career. They can set up and fund Roth IRAs for their children or grandchildren up to the lesser of $7,500 or the individual’s W2 earnings. The math is staggering. A $7,500 Roth IRA contribution for an eighteen-year-old, invested in an equity portfolio earning 9% annually, would grow to more than half a million dollars when that eighteen-year-old reaches age sixty-seven!

In his book The Psychology of Money, Morgan Housel notes that success in investing has more to do with how long you are invested than anything else. In discussing Warren Buffett, he says “the real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.” This is why starting these retirement accounts early in life is so important.

Using the above example, if instead of investing $7,500 at age eighteen, you wait and invest $7,500 at age thirty, and earn 9% annually, you end up with less than $200,000 at age sixty-seven. In other words, waiting just twelve years costs you about $330,000 in retirement savings.

The reason individuals delay retirement savings until later in life is that they do not have enough disposable income in high school, college and early in their career. According to the Bureau of Labor Statistics, food prices in the United States have increased 33.3% since the beginning of 2020, while housing costs are up 32.5% and energy prices surged 48% over that period. As a parent, I can attest to the high cost of childcare. According to Bank of America, United States childcare costs are rising 1.5 times faster than overall inflation.

Since many young professionals struggle to come up with $7,500 for retirement savings, it can be an amazing gift for a parent or grandparent to set these accounts up and fund them. While it may sound boring, there are few better gifts you can give than the peace of mind of a secure retirement. Tanner Freeman and Jeanne Blackmore have written an article detailing the benefits of Roth IRAs and 401Ks and strategies to fund them. The sooner these strategies are started, the more impact they have.