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What Every 401k Plan Sponsor and Fiduciary Should Disclose to Employees: How to Retire a Millionaire (Hint: It’s Easier Than You Think)

February 25
01:51 2014

I happened to stumble upon the answer to this age-old question while counseling a group of Boy Scouts for their Personal Management merit badge. The answer was so obvious – and so easy – that I have since worked it into almost every 401k employee 591083_77999322_clock3_stock_xchng_royalty_free_300education program I do. To discover the answer, I’ll refer back to a 2012 Wharton Study. That study discussed the four factors that lead to retirement success (defined as “saving enough to retire in comfort”). Furthermore, it revealed you can control three of those factors. Of those three, one is most critical and the easiest to achieve.

This is an article about that most significant component to retirement success.

Are you ready? Here it is: Invest Early.

That’s it. No more. No less. It’s also so overused that it has become a cliché. The trick, then, is to use an incredibly shocking example – so shocking it will open employees’ eyes in a multiple dimensions. That’s where the Boy Scout merit badge comes in.

You see, I can think of no other group less interested in retirement than your typical Boy Scout. Whether it’s girls, sports, robots, video games or just about any other activity involving either building something or destroying something, each of these far outrank “retirement readiness” on the teenage thought meter. Still, if they wanted to earn the merit badge, they had to “get it.” Since no valid educational theory involves the use of a sledge hammer, I had to rely on the next best things. These are the things adolescent boys seem to respond to the most: graphics, silliness and becoming a millionaire.

Come to think of it, experience proves more than just adolescent boys seem to respond to these three things.

So I told them the story of two friends: Early Earl and Late Larry. As suggested, Earl tended to do things early. He’d finish his homework before he got home from school. This allowed him to play and the watch TV without any worry. Larry, on the other hand, usually put things off until the last possible minute. He’d be doing his homework the morning before school and find, instead of watching his favorite NFL team play on Sunday, he’d be stuck in his room working on school work that was assigned days before.

Both boys were able to find jobs when they were fifteen and would work – even during their college years – until they retired at age 70. But when they retired, Early Earl found he could live much more comfortably than Late Larry.


Because Earl invested early. In fact, Earl began saving for his retirement when he started working at age 15. He opened up an IRA. Now, he didn’t earn too much in those early years and especially through college, so he only saved $1,000 a year until he turned 30. Then he stopped saving. We don’t know why. Maybe he bought a bigger house and had to pay a big mortgage. Maybe he started saving for his own children’s college education. Maybe, if he was really smart, he started his own child modeling agency, hired his children as infants and put money into his kids’ retirement accounts from before they even started to crawl.

But let’s not get ahead of ourselves.

So there’s Early Earl at age 31, having saved a grand total of $16,000. What’s Late Larry been up to? Well, he’s been, uh, late. He hasn’t saved anything for his retirement. He’s figuring that he’ll earn more when he’s older, so he can save more then. And he does. For sixteen years beginning age 40, Late Larry saves $5,000 more a year. That’s five times more than Early Earl. In fact, by the time he’s done saving at age 55, Late Larry has saved $80,000.

Late Larry has contributed five times more to his retirement than Early Earl. Can you guess which one has more money when they each retire at the ripe-old age of 70? As the graph below shows, by investing even a small amount earlier, Earl is able to grow his assets to $711,483 when retires. Late Larry, though, with so much less time to grow, retires with only $519,446 – even though he saved five times more than Early Earl! (The growth assumption is 8% annually – something you’d typically find in an all-equity mutual fund.)

Graph 1. The Power of Investing Early

Late_Larry_Early_Earl_graphIncidentally, if Early Earl wanted to have a million dollars when he retires at age 70, instead of saving $1,000 a year for sixteen years, he’d only have to increase that number to $1,406 a year for sixteen years. This would equal a total savings of only $22, 496 – still substantially less than Late Larry’s total contribution of $80,000.

Why does Early Earl have a seemingly insurmountable advantage over Late Larry? For those familiar with the term, this graph shows the “Time Value of Money.” Mark Donnelly, Portfolio Manager at AEPG(r) Wealth Strategies in Warren, New Jersey says, “The power of compounding returns is more and more valuable the longer the timeframe. Saving just a little at a young age can have a far greater impact than much larger amounts further down the road because of this.”

Elle Kaplan, CEO and Founding Partner of LexION Capital Management in New York City, says, “The key to retirement saving success is to save consistently and start early. The beauty of investing is that time is on your side: the longer that your wealth is invested in the markets where it can grow, the more potential impact your savings can have. If you start investing when you are a teenager, you will have nearly five decades of growth before you turn 65. Essentially, your money works for you.”

“This is the power of compound interest,” explains Matthew Moore, Founder of Clear Retirement Group in Portland, Oregon. “The teenager has contributed $16,000 dollars in total of his own money but has given himself 20+ years for it to earn interest before the 40-year old even starts saving money. My family ran into this very same problem and didn’t start saving money for retirement until they were in their early 40s. Unfortunately for them, they are now playing catch up and throwing as much of their extra income at their retirement accounts as they can.”

Remember the importance of silliness. Sometimes silliness comes in funny names (think “Early Earl” and “Late Larry”) and sometimes it comes in funny visualizations. Howard Pressman, Financial Planner at Egan, Berger and Weiner, LLC in Vienna, Virginia uses a funny visualization to explain compounding, a term often difficult for teenagers (and even their parents) to comprehend. He says, “Remember the cartoon of the little snowball that starts at the top of the hill and gets bigger and bigger and bigger as it rolls downhill, and then eventually it gets so big it wipes out the town? That’s compounding. You are earning interest on the interest that you earned in prior periods. Just like the farther the snowball rolls the larger it gets, the longer your money has to grow, the larger it gets too. This is one of the most powerful forces in all of finance.”

Why don’t we see a lot of “teenage” millionaires? First, IRAs haven’t been around long enough for our hypothetical 15 year old to have turned 70 yet. More to the point, though, is why haven’t we seen a lot of teenage IRAs in the first place. “In my experience of dealing with young savers,” says Michael Lecours, Financial Advisor & Marketing Manager at Ohanesian / Lecours in West Hartford, Connecticut, “they will always have a reason not to invest – not enough money, simply forgot, or need money to pay other expenses. Something comes along that seems to be more important than saving for something that won’t be used for 50 years.”

Moore says, “For teenagers, retirement is so far away. There are so many things that money would provide more instant gratification such as a new car, new clothes, or eating out. Saving for retirement at that age is not what kids think about nor is it what gets positively reinforced by their peers.”

“It’s hard for teenagers to save for retirement because they can’t comprehend retirement,” says Pressman. “It is so far into the future that it is not even remotely a part of their frame of reference. It’s hard to get many adults to save for retirement and they’re closer. Retirement is for old people, they’re young and they think they’ll be that way forever. I know I’m constantly surprised when I look in the mirror.”

“When you are a teenager you aren’t thinking about retirement, you are thinking about taking a girl to the movies or buying the newest video game or pair of shoes,” says Brett Gottlieb, Advisor, Comprehensive Advisor, Carlsbad, California. “With so many distractions and marketing messages being sent their way, it’s impossible to think about the future, it’s about the now. What’s the hottest thing out, what will my friends say if I get this cool jacket or game? These are what matter at that age, so it’s not about changing the mindset of a teen at that age, it’s about teaching them a value from a different angle.”

“Financial education should start at an early age preaching that the sooner you start saving, the more you could have to spend later,” says Dan Dingus, President and COO at Fragasso Financial Advisors in Pittsburgh, Pennsylvania. “Without proper financial education, they have no context to relate passing on the latte or the additional fast food meal versus savings for retirement which appears so distant. But in fact as mentioned, the value of compounding is so powerful at an early age. It is not how much you save but for how long.”

The idea of parents or grandparents saving for their children/grandchildren – whether through traditional tax savings or specialty trusts – is not new. John Graves, Managing Principal of amid-sized RIA in Ventura, California has “clients who are saving for their teenage grandchildren.”

“The select few clients and children I know that have learned about savings and stuck with it over time have always been connected to parents or grandparents that were good savers and started them off on the right foot, teaching them how to set goals for themselves and how to achieve those goals through calculated steps,” says Gottlieb. “I have had clients bring their kids to appointments when they were in their teens and had them learn about investing and the types of concepts and planning I do with their parents. I think all parents should include their children in the planning process to some extent, it will teach them about the importance of saving. Specifically, most clients have had the children open a checking account and place birthday and holiday gifts into these accounts so they can see them through online statements. Many have shown them their 529 college savings accounts and explained how those accounts got started and have grown.”

But using a retirement vehicle like an IRA is quite rare. What’s the best way to get a teenager to start an IRA? Donnelly says, “From my experience learning to save and maintaining that level of discipline over time is a skill handed down from attentive parents. Either it is as simple as ‘do as I do’ and following their parents methods (with a little guidance), to a full-fledged reward system that encourages both work and savings by matching portions of a teenager’s savings. Either way can work, but the former puts more of the burden of self-motivation on the part of the teenager.”

Anthony VanDyke, President of ALV Mortgage in Salt Lake City, Utah is an example of someone who started saving in an IRA as a teenager. “I started saving for retirement as a teenager,” says VanDyke. “The reason I started saving early is because of something my high school math teacher once told me, ‘There are two types of people in this world. Those who pay interest, and those who earn interest.’” Still, VanDyke believes it’s primarily the parents’ duty to lead by example. “I think it is hard for teenagers to save for retirement because they do not see their parents saving for retirement. Over 80% of my mortgage customers have no retirement savings. Either they have never saved. or they wiped it out over the last few years during the financial crisis.”

“There are always those teens that were raised to be savers and those that will always be spenders,” says Moore. “We all know someone that worked 2-3 jobs over the summer to pay for a new car. Or maybe those that saved all through high school to pay their way through college. Some people are taught these personal finance techniques and others aren’t. But to focus on retirement in their teens, that is a special breed. In my work as a financial advisor to corporate retirement plans I did come across the 18 and 19 year old employee that was actively contributing to their 401k plan. They knew by putting a way a set percentage or dollar amount every pay period, pre-tax, that they would be systematically contributing to their financial well-being.

And for those of you wondering if it makes sense for college-bound teenagers to start saving for retirement, Pressman says, “Retirement accounts are not counted on the Free Application for Federal Student Aid (FAFSA) because withdrawing from 401ks or traditional IRAs would typically create an early withdrawal penalty.”

Adds Moore: “A qualified retirement account such as a 401k or IRA whether owned by the parent or by the child is not counted when determining financial aid. I believe it to be a good idea so that more students and families don’t resort to retirement assets to pay for college. If these assets are not included in the financial aid calculation they will receive more help for education and not have to dip into their retirement savings.”

“Neither students nor parents are required to report qualified retirement assets (regular or Roth IRAs, 401k plans, etc.) on the FAFSA,” says Gottlieb. “So when it comes to determining aid eligibility, these assets don’t count. (Please note: If your child took a distribution from an IRA, that would be considered income, would be reported on the FAFSA, and would affect eligibility—but that’s a very unlikely scenario.) These being exempt are a good idea and allow for you to begin saving at an even younger age then many would think was even possible for retirement savings.”

“The challenge,” says Ozeme J Bonnette, Financial Coach at Tri-Quest Investment Advisors in Fresno and Torrance, California, “is that contributions must be reported, so it’s better to do it early on than in the year or years right before completing the FAFSAs.”

Everyone speaks to the challenges of educating employees when it comes to financial literacy and their retirement plan. But, do you know the best way to learn? The best way to learn is by teaching. And that’s the lesson to take away from this example. Whenever I use this “Boy Scout” example in front of a group of 401k plan participants, I invariably get the question, “Hey! Can you put this into something I can show my kid?” I almost always answer, “Go ahead and use what I showed you and explain it yourself.” I know that if they’re willing to explain it to their own child, then they “get it.” And that, Charlie Brown, is what education is all about.

While he acknowledges teenagers “use the money to chase girls and buy clothes, (has anything changed?)” Dean R. Hedeker, of Hedeker Wealth Management in Chicago, Illinois perhaps best gets to the heart of the matter when he says, “The best thing is that they get a job and then take their earnings and put it in an IRA. The kids will be millionaires by 65.”

Editor’s Note: This article caught fire when it was originally published and led to the concept of the “Child IRA.” The author wrote two companion pieces published in other venues. The first, “This idea will solve the retirement crisis, guaranteed!” (, February 27, 2014), explains how the Child IRA will eradicate the coming Social Security crisis. The second, “It’s time we create a Child IRA” (Benefits Selling Magazine, April 2014), lays out exactly how a Child IRA program would work.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Michael Lecours
    Michael Lecours February 25, 12:10

    Great article… I’ve shared it with some co-workers and they sent it off to their kids to read.

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