Start early while you still have a chance

Tina Haapala |

Written by Gary Silverman, CFP®

It should be easier to save as we get older. Major purchases (first car, home, appliances, furniture) are behind you; the kids complete college (ending the sucking sound from your budget); and your pay keeps going up. But there’s more to it.

Recent studies by the Federal Reserve Bank of New York and the Labor Department show that while wages rise early in our careers, later they stagnate. The Fed study, “What Do Data On Millions Of U.S. Workers Reveal About Life-Cycle Earnings Risk?” shows that our earnings more than double across our lifetimes. But the Labor Department study confirms that the impressive rise isn’t evenly disbursed.

The strongest growth occurs in our 20s and 30s as many tend to rapidly move up the corporate ladder. It makes sense: When we start out we know very little, but each bit of skill and knowledge we gain dramatically improves our worth in the workplace. As time goes on, however, we receive fewer pay raises and the climb up the ladder slows. Fewer advance to the next rung and are left relying on cost-of-living raises instead of those based on new abilities and job titles.

Around our early- to mid-50s things flatten out. And then when inflation is taken into consideration (which it needs to be), our earnings actually drop during the last decade of our working lives.

Of course each of us is different. Some are in fields that are rapidly expanding, keeping demand for our services rising faster than average. Others are in careers we pray will still be around until we can start collecting Social Security. But the average trend is clear. While you indeed have fewer demands on your money, you have less ability to earn that money in the first place.

This flies in the face of conventional wisdom that you can earn your way out of early spending follies. Instead, any poor budgetary habits you establish in your 20s and 30s will get harder to deal with as you get older. You can’t turn back time.

This information also points to a flaw in much of the free financial planning software available on the Internet. Most allow you to pick a singular rate of expense inflation, wage inflation, and investment earnings. In the case of expenses inflation, most will have expenses rise faster than inflation in their working years and less so as they move through retirement. As we’ve discussed, wages go up more slowly as we grow into our careers, and many lower the volatility risk of their portfolio with the result of their investments earning less as they age, making it difficult to make up the difference.

All of this reinforces the importance of getting serious about your personal finances early in your life. Don’t let this discourage you if you are not “early in your life.” No matter how old you are, you still have to plan for the future. Better to begin now and succeed, than to procrastinate and wind up in an unfortunate situation years from now.

This article was published in Wichita Falls Times Record News on October 25, 2015.