Lessons from My Younger Self

Why You Need to Start Saving Now

By William Bernstein

William Bernstein practiced neurology for three decades before retiring in 2005. Along the way he became interested in mathematical finance, wrote multiple books on investing and history, and co-founded a money-management firm.

The author, William Bernstein, at age 7

The author at age 7

I was fortunate to have had an East Coast Baby Boomer middle-class suburban upbringing in an era when college could be paid for with summer work and government support of education was generous.

I once asked my dad if we were rich. His answer: “Your mother and I are comfortably well-to-do. You don’t have a dime.”

I thought I knew what he meant—that I was going to have to make my own way in the world, and that if I failed to study and work hard, I would reap the consequences. I didn’t realize until much later that I had missed the last part of his message: Succeeding was only half the game. The other half was saving.

My savings career began only as an afterthought. Like all young people, retirement was the furthest thing from my mind; I opened my first independent retirement account (IRA) when I was a 27-year-old medical intern. I did not start my retirement plan out of prudent planning for my later years, but as a tax dodge.

The tax code, for the first time, allowed savers below a certain income level to defer taxes on $1,500 of income per year. I’ve always lived frugally, and since I didn’t need the income, it seemed like a sweet deal. (Today, you can defer $5,500 per year, though you get an even sweeter deal when you give up that deferment with a Roth IRA, which does not tax your distributions in retirement.)

Five years later, as my income increased, I no longer qualified for the tax deduction, but I kept the account, and those five years worth of contributions continued to grow. Now, 40 years later, that afterthought has grown into a tidy mid-six-figure nest egg.

The secret sauce that allowed several years worth of relatively small contributions to grow into a serious retirement portfolio is the magic of compounding; if you start early enough, the subsequent decades of running room will work their magic. The math behind this is pretty amazing: Aggressively saving and investing for just 10 years between the ages of 25 and 35 will accomplish about the same result as saving from age 35 to age 60.

Aggressively saving and investing for just 10 years between the ages of 25 and 35 will accomplish about the same result as saving from age 35 to age 60.

The hard part, of course, is the saving. Again, the math is pretty simple: In order to retire successfully, you need to save about 15 percent of your salary. This means giving some things up; if you just have to get the newest iPhone, the most fashionable clothes, the fanciest car, or a Cancun vacation, you’re very likely screwed.

Life without these things may seem Spartan, but it doesn’t compare to being old and poor, which is where you’re headed if you can’t save. The cure? You’ll have to make the commitment to investing in your future financial well-being. Specifically, you’ll have to do three things:

  1. Pay yourself first. Fifteen percent of a $50,000 salary is $7,500 per year or $625 per month. If you’re lucky enough to have an employer 401(k) match, you might be able to reach that same 15 percent with just a $312.50 monthly paycheck deduction (because your employer is picking up the rest). You can do it: Give up your daily latte, your too-fancy cable and smartphone packages, and a few restaurant meals, and you’re there. (You can accomplish the same thing by getting a roommate. And although having a roomie at age 30 may not fit your lifestyle aspirations, I can assure you it’s preferable to having to move in with your kids at age 70.)
  2. Learn enough finance to protect yourself from the hyenas of the financial industry. When you start out, your nest egg will be small, and the only people who will be interested in “helping” you out will be the worst bottom-feeders in the advisory, brokerage, and insurance business. Stay away from them by keeping to the least expensive investment options in your 401(k), or to firms that charge rock-bottom fees.
  3. Take some risks. The prime directive of finance is that risk and return are joined at the hip; if you want high returns, you’re going to have to expose yourself to risk in the stock market, which means that you will, from time to time, lose a large amount of your nest egg. Fortunately, this is almost always temporary. And if you want perfect safety, you’ll be condemned to low returns.

For example, many savers “lost” more than half their savings during the 2007–2009 market meltdown, then compounded the error by panicking and selling near the market bottom. The smart thing to have done was, of course, absolutely nothing. Markets almost always recover, and investors who simply hung on to their stocks now have far more in assets than they did in 2007. (Even smarter was to have continued your automatic payments into the company 401(k) plan or into your personal IRA, which would have bought stocks cheaply during the crisis.)

[Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]

Bill’s Financial Beginner’s Reading List

The road to a successful retirement is decades long, and I’ve provided a road map in the form of a little reading list. Bon voyage!

The Millionaire Next Door
The Millionaire Next Door by Thomas Stanley and William Danko Publisher: Simon and Schuster
Common Sense on Mutual Funds
Common Sense on Mutual Funds by Jack Bogle Publisher: Wiley Publishing
Devil Take the Hindmost
Devil Take the Hindmost by Edward Chancellor Publisher: Plume Books
The Great Depression
The Great Depression: a Diary by Benjamin Roth Publisher: Public Affairs
Your Money and Your Brain
Your Money and Your Brain by Jason Zweig Publisher: Simon and Schuster
How a Second-Grader Beats Wall Street
How a Second-Grader Beats Wall Street by Allan Roth Publisher: Wiley Publishing
All About Asset Allocation
All About Asset Allocation by Rick Ferri Publisher: McGraw-Hill Education