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Dad was right...

February 23rd, 2007 at 04:28 pm

...at least financially.

In my senior year at college, I was both job-hunting and applying for PhD programs in computer engineering (a cross between hardware and software). I hadn't really decided what I was going to do when my dad and I went out for a walk. His advice was that if I started working straight away, and put $2,000 a year into an IRA until I was 30 and then stopped, I would have more money when I retired at 65 than if I waited and put $2,000 per year into the IRA from age 30 to 65. I was 22 and figured most PhD programs take about 6 years. My parents have always made disparaging remarks about "professional students" so it was pretty clear what his recommendation was.

I ended up receiving a killer scholarship -- admission to a top program, $18,000 stipend per year (that's about $25,000 in today's dollars), and guaranteed summer jobs at Xerox -- but turned it down. I didn't want to be a professor, didn't feel like I had the inventiveness to come up with an original research idea, and was sick of school. I went to work, signed up for the 401k as soon as I was eligible, and maxed it out at 15% until I married at age 30, then cut back to 10% until I stopped working when my son was born a few months before I turned 35.

So yesterday I was playing with an Excel spreadsheet, trying to figure out what my Target Savings Goal should be. I was having trouble because the calculations from the Complete Idiot's Guide to Getting Rich assumed you are starting from $0, and they referenced clunky future value tables in the back of the book. Plus I didn't like the numbers that came out because it would really pinch to save that much. So to account for the money we already have invested, I had to figure out how to use the FV, PV, and PMT functions in Excel. I plugged the numbers in -- 10% return, $320k today, 29 years till age 65 -- and kept coming up with either negative numbers or really large values. Finally I used the numbers from our mortgage to figure out where I needed to enter positive or negative values into the functions and what the results mean. As unbelievable as it sounds, in order to have $2 million at age 65, I actually have to take out $20k per year! If I just leave it alone, I will have $5 million at age 65. I am dumbfounded. It brings into question whether I should push so hard to get our savings back to 10% or go take more vacations now.

I said Dad was right about the financial aspect of my career decision. I'm not as certain about the non-financial aspects. Frankly, I'm bored to tears with software now. Just thinking about coding again depresses me. Although I don't really regret not getting the PhD, I think if I had I might have more interesting work to go back to. I suppose I could go do one now, but it doesn't seem right to me to ask DH to support me through both SAHM years and a PhD program -- better for us to find a business we can do together.

4 Responses to “Dad was right...”

  1. monkeymama Says:

    Wow, that is really interesting.

    My dad has taught me a lot about finance but totally poo-poos the power of compounding. My parents all the time tell me we need to live a little more. You know and they always saved like crazy, not that they want us to be frivolous or anything, but they don't really get how us having such a good start will move us ahead. My parents did most of their retirement saving from age 35 and up I'd say, probably had to work a lot harder at it. Of course I think before that they had more faith in their pensions and social security than they do now. Our generation has an edge having a clearer picture that those won't necessarily be there for us.

    Of course I am kind of glad we decided to put more into our house these last 8 years or so out of college because the other money we saved we have not invested well at all. I just feel lucky we are young and we have time to make up for it. I now feel confident I can make a 10% average annual return and that I can make our money work for us. Whatever we had from 20 has earned little. So it has to be done right. most of our retirement balance has earned little over the last decade.

    I am excited though to start investing for the kids. So they can have the edge to know how to save it and to really understand how starting young helps.

  2. zetta Says:

    That is a very good point! It made a big difference that I was able to ask my dad and later my full-service broker which funds in the 401k to choose, and which funds use in the IRA when I changed jobs and did a rollover to an IRA. I see a lot of books and websites that argue against using a broker, but if your are a novice (as I still consider myself to be) some good advice at the right time goes a long way.

  3. monkeymama Says:

    Our broker's return has been lower than what we invested ourselves though so yeah it depends if you had a good broker. Problem is I had too much faith in the broker and not a lot of knowledge myself. But lord knows what exactly he was doing with our money.

    Anyway, let's just say before 2006 I Was wary is an average annual 8% return was realistic in the least. Now that we have dropped the "bad" broker and have armed ourselves with knowledge now I expect that is the minimum we will make going forward. It is such a freeing difference. PArt of the puzzle piece we were missing to building wealth. Our parents certainly did fine for themselves, but overall I think if they knew all this at 20 or 30 themselves they would be far ahead. They really did things the hard way! I look forward to sitting back and letting the investments do a lot of the work. Wink

  4. jIM_Ohio Says:

    several things... I used to work for Xerox, and they lay off people and cut back about once every 7 years... my dad was lucky to survive around 4 layoffs in his 30 years...

    curious if you were looking at Xerox on east or west coast?

    excel rocks... there are lots of good functions to use, ways to create checkpoints (have you saved enough?)... check my blog for some of them.

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