Time: A Non-renewable Resource

Yesterday, I proofread the section of the NTS Connection with photos of the 2007 graduates from Nazarene Theological Seminary. Part of my responsibilities at NTS includes assisting students with placement, so I paid special attention to those who have already accepted pastoral assignments. As I looked at the photos, I remembered that I talked through compensation packages and personal finance issues with some of these grads. One of the things I’ve noticed is that many 20-somethings give little consideration to retirement planning. I didn’t either when I was at their stage in life.

Just a couple of days ago, I finished our family’s quarterly financial review, including preparing a net worth statement. In contrast to the recent grads, retirement planning is a primary concern as my wife, Judi, and I are probably in our last decade of working for a salary.

Time is one thing a young seminary grad has that I don’t. When it comes to retirement planning, time is a non-renewable resource. The earlier you start, the easier it is to build financial stability for the retirement years. Someone who gets a late start can still have adequate resources in retirement, but it will require larger contributions through the years.

I didn’t get serious about retirement planning until I was 39 years old. As I learned about investing for the long-term and realized how much my inattention had cost me, I began talking to our kids about the importance of starting early. Then, in a personal finance magazine, I found an idea that Judi and I implemented.

While our kids were in high school, after they started working part-time, we told them that we would match dollar-for-dollar any contribution they made into an Individual Retirement Account (IRA) up to $1,000 a year. (This example assumes they earned at least $2,000 since contributions to an IRA must be from earned income.) We modified the plan slightly after they graduated from college and began jobs that provided retirement plans. They now contribute to their employers’ retirement plans—and get company matches—and we give them $1,000 to be invested in their IRAs.

Let’s do the math. Calculations of this sort are only as good as the assumptions made, so here are the numbers used in these projections.

• Let’s use an annual contribution of $2,000.
• We’ll use a 7% annual return. Stocks have historically returned on average about 10%. Subtract from that the 3% average rate of inflation, and you get 7% as an inflation-adjusted return.
• Finally, we’ll use 21 years as the time frame. That’s the number of years between when our son, Jason, was 15 years old and we started this plan, and when I turn 60 and may not have the cash flow to continue.
• An annual contribution of $2,000 invested at 7% will grow to $89,730 in 21 years.
• Since the IRA is a retirement account, Jason will not touch it until he is of retirement age, another 24 years. If that $89,730 continued to grow at 7% until Jason turned 60, it would be worth $455,143. This assumes that Jason would not make additional contributions, but, of course, we hope he is in the habit of doing so and would continue.

Since I didn’t start with retirement planning until I was 39, how much would I have to invest each year to reach the $455,143 value by the time I was 60? I would have to invest $10,145 each year.

For Jason, he could invest a total of $42,000 in 21 years, then let that work for another 24 years to achieve the goal. I would have to invest a total of $213,045 to reach the same goal. That’s $171,045 more! The difference is the time element which allows for the miracle of compounding, that is, investment return on the returns from previous years in additional to the amount contributed to the retirement account.

Recent seminary graduates have a lot of financial issues to juggle: student loans, consumer loans, delayed car maintenance, etc. With retirement 35 years away for these young pastors, retirement planning often is not a high priority. There is no one-size-fits-all personal financial plan, but when thinking about retirement planning, one of the factors that must be considered is time. Time is a non-renewable resource.

Originally published by Pensions & Benefits USA.