Scheurman -- Scavenger Hunt


Tax-Sheltered Accounts or 403(b) Retirement Savings Plans:
The Magic of Compound Interest


Or “Looking Out for Tax-Sheltered Accounts”
Or “The Time Value of Money” (even for those who don’t make much)
Or “The Advantages of Investing as Early as Possible”
Or “How Scheurman Missed Out on a Boatload of Money”

In my earliest years of teaching, I remember reacting with disdain toward a small town broker named Clark Lupton who worked for the Horace Mann Insurance Company. He would hang around the teacher’s lounge trying to convince us to let his company take money out of our paycheck and invest it in a tax-sheltered annuity account. As a young parent and idealistic teacher, retirement was the furthest thing from my mind. Every fiber of my being hated this moneychanger as he sullied the sacred ground of the school and tempted us with his demonic and selfish wares. Hindsight is always 20-20, and anything can go “wrong” in a worldly sense, so DO NOT TAKE THIS AS FINANCIAL ADVICE. Any risk you take is your own, but for what it’s worth, the “facts” are. …

Had I listed to Mr. Lupton and invested 100, 50 or even 25 dollars per month (fairly meager even in those days) for the FIRST 11 YEARS of my career – even if I STOPPED and never made another contribution the rest of my life – my account would have grown to an amount considerably LARGER than if I had waited until I was 35 and begun contributing three times that amount every month for 30 years until I retired! And we’re talking some pretty large numbers here (well into the multiple six figures). Examples revealing this phenomenon are startling (see websites below).

The reason this is possible is the concept known as COMPOUND INTEREST, or its cousin concept, the “time value of money.” Most school districts offer employees the opportunity to capitalize on this concept by allowing them to participate in a voluntary retirement savings program called a form of TAX-SHELTERED ACCOUNT, or “TSA” (not quite the same as tax-sheltered ANNUITY, a different product that you actually buy with retirement funds when you are actually ready to retire). The official title for these financial vehicles is a 403(b) Plan. Here’s how it works.

You agree to have your district set up a TSA for you. They will have identified companies or vendors (regular investment firms) and different products (stock, bond, global, money market funds, etc.) which you can choose for your investment dollars. With each paycheck, your employer subtracts the amount you choose to invest BEFORE TAXES ARE APPLIED. This means you DO NOT PAY TAXES ON THE AMOUNT THEY DEDUCT and you get to keep more dollars in the long run. The money is automatically deposited with the investment company, who places it in mutual funds or other vehicles you choose. It sits and grows over the course of your entire career. New contributions are combined with interest and dividends, which results in the “compounding” effect over time. Even better, ALL TAXES ON THESE COMPOUNDING FUNDS are deferred until the time you retire, at which time it is presumed you will be in a lower tax bracket. The reason you could STOP investing early in life and still make a bundle is because all money you make on the investments themselves is constantly reinvested without taxes being taken out. The longer it sits there compounding, the larger it becomes. TIME is a greater factor than MONEY in this exponential growth!

Various considerations can affect the outcome of any financial decision, including expenses associated withy investment company’s funds, actual yields on investments, gyrations in the stock market, and many other factors. So you should be sure you get smart about these matters before you make any decisions. I may not even have all the “facts” straight in this report and they will likely change over time anyway. So again, please do NOT take this as financial advice. It is just an introduction to how compound interest works. The formulas can become complicated, but I have listed a few websites below that show the math clearly.

Punch line: Even a little investing early may amount to a considerable gain later on. I think this has a metaphorical lesson as well as a financial one, pertaining to the value of small investments in our intellectual and spiritual lives that accumulate or “compound” over time leading to substantial “gains” later on. This concept can be abused if we take it only for its materialistic advantages, but I am certain that it applies in the “invisible” realm of the soul nevertheless. It turns out that the “value” I think I missed by not listening to Clark Lupton can be returned seven-fold if I open myself to the experience of spiritual value, even that which I missed when I finally did start investing in a materialistic fantasy of what might provide me value that is already self-existent. This is a topic for another time. …

Back to the financial phenomenon, here is a simple description with some easy to understand examples:

An explanation of compounding and the value of starting early:

Similar, suggesting what might happen if someone had actually started this for you when you were a child (the principle applies no matter WHEN you start, it just adds up astronomically the longer compounding is allowed to work):

For this one, scroll down the page to find the example of Tim and Sally. Sally contributes ten times more and for more years but Tim starts earlier. Look where they end up.

There are many other sites, some with additional information such as the famous “Rule of 72” (showing how long it takes to double and investment). If you want to stretch your understanding, here is a website that describes the Rule of 72 and I also discovered that Wikipedia covered the technical aspects of the topic quite thoroughly: