Out of the mouths of teenagers

[AMandM]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

[yakamashii]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

They taught this stuff when I was that age (late 90s). I remember being impressed by the math, but wondering where all the bank accounts with 8% interest were (wonder what rate they're using now).

[Not Sure]

Nice job paying it forward AMandM!

[Car Jack]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

They taught this stuff when I was that age (late 90s). I remember being impressed by the math, but wondering where all the bank accounts with 8% interest were (wonder what rate they're using now).

In the late 80's, early 90's, that would not be hard to do.  In 1989, while in grad school, I put $10k into a CD (minimum $10k) that was 6 month duration and paid 10% APR. 

[AMandM]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

No, if you save 50% of your earnings, then each year you work covers your expenses for two years. One of those two is the year you are working and the other is a future year in retirement. He was assuming that every dollar you spend in retirement has to be saved out of earnings while working.

[yakamashii]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

No, if you save 50% of your earnings, then each year you work covers your expenses for two years. One of those two is the year you are working and the other is a future year in retirement. He was assuming that every dollar you spend in retirement has to be saved out of earnings while working.

Interesting way of thinking about it. Framing it my way (you have to work 2N years to have N years of expenses _for retirement_) I think drives home the importance of investing/compound interest.

[Cranky]

Compound interest is sure not what it used to be. I think people are relying on some different magic these days. ;-)

[Zamboni]

Oh, to be a teenager and sock it away in a Roth and never pay tax on that compounding interest until you retire.

One of my high school friends did that. We thought she was nutty. We were wrong. I wish I had taken her financial common sense math class in HS instead calculus  . . .

[Davnasty]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

No, if you save 50% of your earnings, then each year you work covers your expenses for two years. One of those two is the year you are working and the other is a future year in retirement. He was assuming that every dollar you spend in retirement has to be saved out of earnings while working.

Interesting way of thinking about it. Framing it my way (you have to work 2N years to have N years of expenses _for retirement_) I think drives home the importance of investing/compound interest.

Shouldn't it be, you have to work N years to have N years of expenses for retirement given 50% savings rate? Spend half now, save half for retirement.

[yakamashii]

I was chatting with a teenage family friend and somehow the topic of retirement came up. He was puzzled--how could anyone ever retire and have enough money to spend? He's heard that "you have to save for retirement" but it seemed to him that even if you saved half of what you earn, you'd have to work for N years to have 2N years worth of expenses.  So I explained about compound interest and showed him some graphs. We played around with various scenarios (historical stock market returns, low-interest savings account, different levels of post-retirement spending).

At the end he said, "Wow! They should teach this stuff in school!"

"work for 2N years to have N years worth of expenses," right?

No, if you save 50% of your earnings, then each year you work covers your expenses for two years. One of those two is the year you are working and the other is a future year in retirement. He was assuming that every dollar you spend in retirement has to be saved out of earnings while working.

Interesting way of thinking about it. Framing it my way (you have to work 2N years to have N years of expenses _for retirement_) I think drives home the importance of investing/compound interest.

Shouldn't it be, you have to work N years to have N years of expenses for retirement given 50% savings rate? Spend half now, save half for retirement.

You're right, I got confused. I was aiming to express the difficulty of saving up all that cash with no help from compounding. Thanks to you and OP for persisting politely when I persisted on putting my foot in my mouth =(

[LetItGrow]

Oh, to be a teenager and sock it away in a Roth and never pay tax on that compounding interest until you retire.

You mean never pay tax period on the entire ROTH account in retirement.

[Zamboni]

^Yep, that.

But it is the compounding interest that becomes truly magical if you just put in a little and then wait for a long time.

[TomTX]

^Yep, that.

But it is the compounding interest that becomes truly magical if you just put in a little and then wait for a long time.

Let me be a bit picky here - I hope it's compound growth, not interest. Interest is the rate paid for a savings account. I sure hope she's largely in stocks.