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A friend of mine recently joked that if anyone planned a $ 40,000 wedding (about average, according to some accounts), "Paul Merriman would say: organize a $ 1,000 wedding and place the $ 39,000 remaining in a Roth IRA that earns 10% for 40 years. You will never have to add another penny to retire. "
When I heard about it, it caused me to think. And by calculating. It turns out that my friend was fairer than he thought.
I hope you will not misunderstand that I am against weddings or against marriage. Not at all.
But if a couple or their families actually have $ 40,000 to spend on a wedding, is that the best use of that money? The wedding organizers and the wedding industry as a whole may hate me, but I must admit that I doubt that this is the best use of $ 40,000.
Imagine for a moment what a bride could do with $ 39,000 from age 25. (I'm talking about bride instead of bride only because it's long been a tradition for the bride's family to pay for a wedding.)
Assuming she has enough income to qualify for a Roth IRA, she could immediately pay $ 6,000 (as of 2019), leaving part of her $ 39,000 start paying duty-free. 39; tax.
She could put the rest in a taxable account, also earning 10%, and add another $ 6,000 to her IRA the following year. If the taxable account continues to grow by 10% and if it pays the taxes each year with the help of segregated funds, it will be able to continue to fund the IRA for several years, gradually integrating the entire of this tax shelter.
I asked a colleague to help me do the math to see how it would work for the bride who arranged for a $ 1,000 wedding (which is still enough to organize a modest party and pay a preacher).
Here's what we found, baduming that a 25-year-old wife retires at age 65:
Using an badumed annual return of 10%, which is consistent with the historical performance (1970-2017) of a Vanguard Target Date Retirement Date, we calculate that its balance after 40 years, at the age of 65, would be either $ 1.77 million.
That's more than $ 45 for every dollar invested instead of being spent on a wedding.
If she continued to earn 7% at retirement and withdrew 4% of her account balance each year for her retirement income, these accumulated withdrawals would reach $ 3.21 million by the time she reaches age 95. All his income is tax-free.
And at age 95, his Roth IRA was worth $ 3.95 million.
Add the money she has withdrawn and the total is $ 7.16 million, or $ 183 for every dollar that was not spent on marriage 70 years ago.
Presumably, this wife would have income on her way to finance a 401 (k) or similar retirement savings account. The existence of unspent wedding money could supplement her retirement income and reduce the pressure on her to save as much as she can while she works.
However, she could probably do a lot better than that if she adopted the two funds for life investment strategy that I recently proposed.
This strategy relies on a small cap value fund to supplement a target date fund to generate returns superior to those of a young investor. This "stimulus fund" is being phased out as the investor approaches the age of retirement.
With this change in the badumptions we used previously, we calculated that the bride's Roth IRA would reach $ 3.03 million at age 65. His accumulated retirements over the next 30 years would be approximately $ 5.5 million.
And at age 95, the Roth IRA would have a value of nearly $ 6.8 million.
Add its cumulative withdrawals and the total is $ 12.3 million, or close to $ 315 for every unspent dollar for this long-standing marriage.
Now, I realize that she has paid a price for all this. She had to give up a dazzling marriage with all the traps.
But what do you think she would say if she were asked, on her 95th birthday (or any birthday after her retirement), if she would give up the money for having had a bigger wedding? This is an interesting question.
My wife told me bluntly that $ 1,000 is totally insufficient for a wedding in the 21st century, especially for a wife who has substantial financial resources.
She rightly pointed out that a wedding is more than just a party. This is an opportunity for two families to blend.
So, what about the following: With a budget of $ 5,000, I think a 25-year-old bride could organize a respectable wedding – while reserving $ 35,000 for her retirement and her legacy.
So, here are the results, hypothetical of course, starting with an investment of $ 35,000.
Assuming the same compounded rates of return, with a target date fund, it would have $ 1.58 million at age 65 (instead of $ 1.77 million). Its cumulative 30-year retirement savings would amount to just under $ 2.9 million (instead of $ 3.21 million). And at age 95, his Roth IRA would represent "only" $ 3.54 million (instead of $ 3.95 million).
The total final value and retirement withdrawals would amount to $ 6.42 million (instead of $ 7.16 million).
Using my two funds for life investment strategy and starting with $ 35,000, his account would be $ 2.72 million at age 65 and about $ 6.1 million at age 95. from just over $ 11 million.
The advantage of all these numbers is that they do not take into account inflation, which should continue. Based on the actual inflation of the last 70 years, the total life years (in 2018 dollars) should be in the vicinity of one-tenth of the figures cited here.
But this could still represent a lifetime gift of a million dollars.
No matter how you cut that dice, you can start to see the huge opportunity cost of this fantasy wedding over a lifetime – the opportunity lost for 70 years of ROI.
There is another good news here.
Although most brides and their families do not have the resources for a $ 40,000 wedding, many families could reserve $ 3,500 for a cash gift. Invested as I described it, it could reach $ 100,000 or more (in real dollars and not inflated) over a long life.
It would be a sacred wedding gift, a gift that deserves serious attention.
Richard Buck and Daryl Bahls contributed to this article.
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