The Power of Delayed Gratification: A Recommendation for America's Emerging Workforce

By Patrick Wade

October 17, 2019

Estimated Reading Time: 4 minutes

The Power of Delayed Gratification: A Recommendation for America's Emerging Workforce

During my freshman year at Marquette University, I took a psychology class as part of my general education requirements. Personally, I’m not great with any of the sciences, and even worse with the arts, but psychology struck a chord with me because it’s a way to understand how people tick. It wasn’t until years after I realized how relevant those topics were in the financial industry.

In one particular lecture, my professor discussed a study conducted by psychologist Walter Mischel, a professor at Stanford University. The purpose of the study was to understand the control of delayed gratification in children and how it would impact them later in life. In the study, a child was offered a marshmallow which the child could eat with no repercussions. However, if the child waited 15 minutes, they would receive a second marshmallow. The conclusion of his study found that children who were able to wait the 15 minutes fared better in life in most aspects, including SAT scores, educational attainment, and other life measures. Reflecting on this lecture again, I can’t help but think of how relevant that study is to new college graduates and their personal finances.

Mischel's Moderation

After graduation, many young adults receive their first paycheck in their entry level positions. For most, this is the largest paycheck they’ve ever received, and many will splurge on new clothing, expensive nights out, and maybe even a few vacations. It’s the first time in our lives we don’t have to stretch $50 over the course of a month and we can afford to spend some money on ourselves. What many of these young adults don’t realize is how essential it is to start saving for retirement. You may ask yourself, “Retirement is almost 40 years away, why start now?” or say to yourself “I’ll start in a few years – I just want to enjoy myself now”.

This is where Mischel’s study becomes relevant. We can spend all of our money now and receive instant gratification. When it’s time to retire, however, will we look back and wish we hadn’t eaten that first marshmallow? If not the whole thing, maybe even saved a small portion?

Marshmallow Math

So how much of the marshmallow do you have to put away every month? For example’s sake, let’s assume you’re trying to save $1MM retirement account by the age of 65. As you grow older, the contributions grow exponentially. The chart below assumes a growth rate of 7% in a tax-advantaged account:

Image

At 20 years old, the required monthly contribution is a mere $264/month. At 30, this increases to $555/month and at 40, this increases to $1,234. Just looking at the chart above, it’s apparent that the sooner you can contribute to your retirement account, the better.

So what options do you have? Most companies will offer the option of a 401(k), with some even offering a contribution match. If your employer doesn’t offer a 401(k), your next best option would be a Traditional IRA or Roth IRA. The Traditional IRA requires you pay taxes with each withdrawal, and the Roth IRA requires you pay taxes with each contribution. Both, however, offer tax-free growth in the interim.

While it’s tough to put away a portion of your paycheck, this small contribution will literally pay dividends in the future. To me, that seems like a small price to pay in order to have comfortable, appropriately funded retirement – all that’s required is that we save some marshmallow for later.

Image

Patrick Wade is an Associate Advisor at Chicago Partners Wealth Advisors. He works with teams to help clients manage and optimize their wealth.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.

October 17, 2019

Estimated Reading Time: 4 minutes

The Power of Delayed Gratification: A Recommendation for America's Emerging Workforce

During my freshman year at Marquette University, I took a psychology class as part of my general education requirements. Personally, I’m not great with any of the sciences, and even worse with the arts, but psychology struck a chord with me because it’s a way to understand how people tick. It wasn’t until years after I realized how relevant those topics were in the financial industry.

In one particular lecture, my professor discussed a study conducted by psychologist Walter Mischel, a professor at Stanford University. The purpose of the study was to understand the control of delayed gratification in children and how it would impact them later in life. In the study, a child was offered a marshmallow which the child could eat with no repercussions. However, if the child waited 15 minutes, they would receive a second marshmallow. The conclusion of his study found that children who were able to wait the 15 minutes fared better in life in most aspects, including SAT scores, educational attainment, and other life measures. Reflecting on this lecture again, I can’t help but think of how relevant that study is to new college graduates and their personal finances.

Mischel's Moderation

After graduation, many young adults receive their first paycheck in their entry level positions. For most, this is the largest paycheck they’ve ever received, and many will splurge on new clothing, expensive nights out, and maybe even a few vacations. It’s the first time in our lives we don’t have to stretch $50 over the course of a month and we can afford to spend some money on ourselves. What many of these young adults don’t realize is how essential it is to start saving for retirement. You may ask yourself, “Retirement is almost 40 years away, why start now?” or say to yourself “I’ll start in a few years – I just want to enjoy myself now”.

This is where Mischel’s study becomes relevant. We can spend all of our money now and receive instant gratification. When it’s time to retire, however, will we look back and wish we hadn’t eaten that first marshmallow? If not the whole thing, maybe even saved a small portion?

Marshmallow Math

So how much of the marshmallow do you have to put away every month? For example’s sake, let’s assume you’re trying to save $1MM retirement account by the age of 65. As you grow older, the contributions grow exponentially. The chart below assumes a growth rate of 7% in a tax-advantaged account:

Image

At 20 years old, the required monthly contribution is a mere $264/month. At 30, this increases to $555/month and at 40, this increases to $1,234. Just looking at the chart above, it’s apparent that the sooner you can contribute to your retirement account, the better.

So what options do you have? Most companies will offer the option of a 401(k), with some even offering a contribution match. If your employer doesn’t offer a 401(k), your next best option would be a Traditional IRA or Roth IRA. The Traditional IRA requires you pay taxes with each withdrawal, and the Roth IRA requires you pay taxes with each contribution. Both, however, offer tax-free growth in the interim.

While it’s tough to put away a portion of your paycheck, this small contribution will literally pay dividends in the future. To me, that seems like a small price to pay in order to have comfortable, appropriately funded retirement – all that’s required is that we save some marshmallow for later.

Image

Patrick Wade is an Associate Advisor at Chicago Partners Wealth Advisors. He works with teams to help clients manage and optimize their wealth.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.