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Are you scratching your head for gift ideas? For most of us, we have everything we need. It is increasingly hard to come up with gifts that really add value to one’s life. Does my kid need yet another toy? Does my husband need another tie/shirt/belt? Does my wife need another purse or another diamond ring?

Personally, I believe the holidays are about getting together with loved ones, sharing meals, playing games, sharing experiences such as hiking, sight-seeing, going to museums, or trying new things together (for example, trail rides on horses.) I don’t spend time or money on trying to purchase variations of items that the person already has or does not have for good reasons (simply put, it is not worth the money/opportunity costs to the individual).

You may also have a spouse or parent who’s eager to shower you with gifts. Perhaps the only thing you want this year is to save enough money for a down payment for your first home, perhaps you big wish is to throw 20k at your student loans, or perhaps you want to max out the 5.5k limit for ROTH IRA before April 1st 2016 for the tax year 2015. In most cases, you may not be able get such as Christmas gift, not in its entirety at least.

But why not ask for part of it? Instead of getting a suit that’s worth 1k from your spouse who thinks you need to look sharp as a doc, (not knowing that we love wearing scrubs day in and day out) ask your spouse to help contribute 1k to your ROTH IRA or 401k.

This 1k towards your ROTH IRA will be worth $14,785 at retirement (assuming you are 30 now, retire at 65 and your 1k is put in a low cost vanguard index stock market fund earning 8% annual return over the long term). If you have the good fortune of living till 85 years old, you get $1,506 yearly for 2 decades after retirement.

That’s the power of compound interest and time.

So convert the 1k suit you don’t need to ROTH contribution that grows to $14,785 by your retirement and provide you with $30120 through out your retired years. 

Now say for the next 5 years while you are still in residency, you skip the suits and contribute 1k per year to your ROTH instead.  After contributing 5k total through 5 Christmas, you have $5,867 at the end of residency.

Assuming you are 30 now, retire at 65 and your 5 consecutive 1k over the next 5 years is put in a low cost vanguard index stock market earning 8% annual return over the long term; by retirement, you will have $59,038.

You have nearly 10 times as much at retirement as the 5 suits are worth initially.

Chances are your suits may not last or fit you in 30 years, but and extra $59,038 in retirement is surely much appreciated. 

Another point from the above exercise is that 1k at age 30 grows nearly 15 times in 35 years while about 6k at 35 grows nearly 10 times in 30 years. The difference of 5 years!

This reminds us the importance of NOW and as early as possible. 1k you put in NOW is much more valuable than 1k in 10 years because the first 1k gets to grow at 8% for 10 more years (8% return rate gives a doubling time of 9 years). So your 1k now is worth 2k in 9 years. So if you wait 9 years before contributing, you would have to put 2k instead (in addition to your then annual contribution) to catch up.

Merry Christmas! Carpe Diem!

  • What gifts are you giving or receiving?
  • Can you benefit from a suit-to-ROTH or purse-to-ROTH conversion?
  • Is there a purchasable item/experience NOW that can bring you as much lasting happiness as more nest egg in retirement or earlier retirement?
Christmas, a gift that keeps on giving!
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