Compounding Procrastination

by

Patty Wagner

For the past 4 months, my daughter has been nagging me to help her open an Individual Retirement Account (IRA) using \$1,000 she received for graduation. She had heard that making a modest investment while young will generate huge returns over time.

Unfortunately, I have been putting her off and in the meantime, the stock market has been doing quite well.

For this investigation I will explore two questions:

• How much money has my procrastination cost her to date, if any?
• How much money over her lifetime (until her likely retirement) will this translate into? I will also see how much money this single contribution will generate over the next 50 years (assuming she retires at 68) and what the equivalent earnings would have been had I opened the account 4 months ago.

To answer the first question, I did some leg work to find what the average return has been since mid July for the account we plan to open. With an investment amount of \$1,000.00, our choices are fairly limited. A good option is the Vanguard STAR Fund with no fees and a low expense ratio. The risk is moderate and the fund has an average 9.55% return rate since its inception in 1985.

To my dismay, it appears that over the last four months the fund enjoyed very good returns. I can't claim to have saved my daughter any money by my delay; in fact, she missed out on a growth rate of 25.89%. My procrastination has cost her, to date:

\$1,000(.2589) + \$1,000 = \$258.90!

Vowing to not let my daughter see this write-up, I used an Excel spreadsheet to develop data that will allow me to see many things at once:

• If we open the account today, how much money will be generated each year over 50 years, assuming a future return rate similar to past performance.
• How would this value compare to the amount generated if I "pay for my procrastination" by depositing the amount she would have had by this time had we opened the account on August 1, 2009; specifically \$1,258.90.

Here is what I found:

The bottom line is that after 50 years, if she doesn't add a single contribution to the fund, her \$1,000 investment will have grown to \$82,622. That's \$81,622 in interest. Perhaps we should make this a Roth IRA!

The bad news is that if I had opened the account just 4 months ago, she would have generated \$103,013 in interest by the same date. Over my daughter's lifetime, until her retirement, my negligence will have cost her \$21,391.

To visually understand the process of compound interest, I generated the following graphs:

This graph shows the effects of compound interest. It's clear that the most significant growth occurs in the last 15 years or so. Additionally, the cost of my procrastination becomes more glaring as time passes.

The cost of my delay stays relatively low for most of my daughter's lifetime. In fact, it doesn't even get to \$5,000 until she is 52 years old.

After that, however, the cost rises rapidly. By the time my daughter retires, my 4 month delay will have grown into lost earnings exceeding \$20,000! By then I'll be 95 years old. Will I care? Will I even remember??

Maybe I should just cough up the \$258.90.