4 Ways Young Adults Can Become Millionaires: Levine, Johnson

What You Need to Know

Modest versus high-end life choices can make a multimillion-dollar difference.
A Roth IRA can save future tax bills while offering access to funds earlier if needed.
The time advantage of saving early makes it much easier to build a nest egg.

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The advice to start saving early in life is hardly new, but young people may need some specifics and inspiration on how and why to build toward their future wealth.

Buckingham Strategic Wealth’s chief planning officer, Jeffrey Levine, and Buckingham wealth advisor Jeff Johnson, author of the recently published book “One Decade to Make Millions: A Strategy to Maximize the Power of Your Twenties,” offered steps young adults can take to do just that.

Among other points, Johnson emphasized the importance of time in enhancing wealth, and how saving at the dawn of adulthood, if not sooner, can make it far easier to achieve important life goals.

Advisors looking for convincing materials to share with young clients may find these talking points helpful when working with them or their parents and grandparents.

Save Early and Often

First, Johnson suggested that young adults starting saving right away. Clients who miss the savings opportunities in their 20s essentially leave out half a lifetime’s earnings, he said.

In his book, he cites for comparison a 20-year-old with no savings who starts investing $417 a month from her 20th to 30th birthdays only and keeps the money invested until her 70th birthday, and a 30-year-old who saves $417 month from his 30th to 70th birthdays.

Both hypothetical investors earn 8% returns. The one who started at 20 and stopped at 30 invested about $50,000, while the one who started at 30 and stopped at 70 invested around $200,000. While the 30-year-old would wind up with nearly $1.3 million at age 70, the one who started investing at 20 would have almost $1.6 million, thanks to compounding (earning returns on both the investment and the returns), Johnson noted.

And if the 20-year-old had kept investing until age 70 rather than stopping at 30? She’d have built a nearly $2.9 million nest egg.

“The 20-year-old scores a big win with less effort because she started saving earlier in her lifetime,” he wrote, adding that people entering adulthood should start saving and investing now if they hope to live larger and more comfortable lives as they mature.

Be Intentional With Life

Building a healthy financial future isn’t about the money alone, according to Johnson, who suggested that young people be intentional with their lives. They should think about what they want to do and achieve and why.

This will motivate them to give up temporary pleasures and build something, he said. It can change someone’s life, impacting their family, the home they live in and the health care they can provide, he added.

“These things are all made better and lower-stress if you have some wealth,” Johnson said, noting that a lack of assets can heap stress on people.

The ‘Right Size’ Home

Johnson also recommends young people own the right size home, a concept that extends well beyond the house itself.

Sometimes it’s better to have an apartment and save the difference between rent paid and home ownership costs, which could create a substantial amount of money and “wind at your back,” he said on the webcast.

In his book, he detailed the financial habits of a bookkeeper with a two-year business school education who lived and spent modestly, comfortably and peacefully with his homemaker wife and their children, invested from his earnings and a $50,000 inheritance, and wound up with a $5 million retirement nest egg.

In contrast, a doctor who earned $1 million a year and lived a flashier and more expensive lifestyle — new cars, country club memberships, a big house in a high-end neighborhood — when approaching retirement, had amassed only enough wealth to carry him for a few years at his desired income level and needed a more frugal “Plan B” for retirement, according to Johnson. The doctor also had significant debt.

Look to Roth Accounts

Buckingham’s Levine noted the importance of maximizing tax-wise investing.

While one investing choice doesn’t necessarily apply to everyone and every situation, young adults in general would do well to put their earnings into Roth IRAs or 401(k) accounts, which offer tax and other advantages, according to Levine, Buckingham’s chief planning officer.

With traditional IRAs and 401(k)s, employees save on taxes when they put money in but must pay years later when they withdraw from their retirement accounts, he noted. In contrast, Roth IRAs and 401(k)s provide no up-front tax savings but allow individuals to withdraw funds tax-free.

Young people as a general rule probably have the easiest decision on this choice, as their income is lower now and a tax deduction wouldn’t be worth as much to them, Levine explained. Assuming their income rises, their tax rate will likely rise, giving them a higher tax rate later when they need the money, he said.

A Roth retirement account, therefore, is generally a superior option, as it allows taxation at the current rate, not a higher future one, he said, noting that it essentially is a pre-payment on a future tax liability.

Roth IRAs offer another important advantage. With a Roth IRA, a young person can change their mind without any tax consequences, Levine said. Any contribution can be withdrawn at any time for any reason 100% tax- and penalty-free — regardless of age or how long the money has been in the account, he explained.

This should eliminate any fear about possibly needing the money before retirement, Levine said. He advised talking with a financial advisor or tax professional because not everyone’s situation is the same, but for most young people the Roth account is the way to go, he said.

Among other recommendations, Johnson suggested young savers, even those in lower-paying jobs, save money every time they touch money. “I call it building savings muscle,” he said.

Johnson also suggested they have a cash reserve, as “you need to be liquid, not leveraged.” A  cash reserve allows people to have a comfortable life and to make choices, he explained.

People building a solid financial foundation also should avoid “bad debt,” which Johnson defines as borrowing for items that lose value or have little value from the outset. In contrast, “good debt” creates profits or increases in value, like a home, a business or the right education, that is, one that leads to a good income, Johnson said.

Bad debt is usually non-deductible, he added.

Very few people get in trouble with good debt but many become buried by bad debt, Johnson noted.

(Shown in photo: Jeff Levine)

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