MW Hey Gen Z: Retiring rich is easier than you think

By Brett Arends

Start early, finish first

What do young people actually learn in schools these days? Maoist dogma? Finger painting? Anything at all?

This question comes up yet again following the news that just 19% of Generation Z - fewer than 1 in 5 - understands the magic of mathematical compounding and how it can affect their finances.

This nugget comes from a new survey of just over 2,500 Gen Z individuals at least 18 years old and with at least $10,000 in investible assets. It was conducted by the Harris Poll on behalf of the Nationwide Retirement Institute.

I am probably just being an old curmudgeon and unfair to schools. But I was probably no older than 10 when a teacher taught us about compounding using the famous fable about the man who invented chess. I assumed everyone had learned it.

In case you never heard it, the fable - or apocryphal story - is set in ancient India, where chess began. Supposedly the king was so delighted with the invention he promised the inventor anything he wanted. Cunningly, the inventor replied that he simply wanted rice: One grain on the first square, two on the second, four on the third, doubling the amount each square until all 64 were filled. The king was baffled and thought this request was trivial - until he discovered what happened when you compound numbers. By the time he was halfway through the chess board he had to supply over two billion grains of rice, and by the final rows the numbers are incomprehensible. (By square 64, the figure is 9,223,372,036,854,780,000.)

The story was a good way of drumming into the heads of children the power of compounding. It's something everyone should understand at a basic, visceral level.

If you're young - even if you're middle-aged, actually - compounding is why saving for your retirement is, to be honest, a piece of cake. It's only for those of us who are older that it becomes trickier, with risks of bear markets and lost decades.

In a nutshell: If you're young, throw some money into the stock market and just leave it there. Don't check it or look at it. Don't buy anything other than stocks, and use low-cost index funds. To maximize your diversification, consider a mixture of an equal-weighted U.S. fund (such as the iShares MSCI USA Equal Weighted ETF EUSA) and one or two international stock funds (such as the Vanguard FTSE Europe ETF VGK or the Vanguard FTSE Pacific ETF VPL.) Ignore those who tell you to have all or nearly all your money in U.S. stocks, such as in just the S&P 500 SPX SPY or the Nasdaq Composite COMP QQQ.

If I were in my 20s today, I'd do this with leverage, to maximize my long-term exposure to stocks even when I didn't have much money.

The reason for doing this is that you will not need the money for many decades - if you are Gen Z, for 40 or 50 years - and over such long periods of time this strategy has never, ever failed.

There is some debate about what long-term return we should all expect from stocks. The number professionals look at is the so-called real return, meaning the return after deducting inflation. (If your investments go up 20% in a year, but consumer prices have also gone up 20%, you have gone nowhere in "real" terms.) Optimists say we should expect an average "real" return over the long term of 7% a year. Skeptics think the number may be closer to 5% or even 4%. Some people think it's even lower.

Nobody knows for sure, but there's one thing we do know: So long as the number is positive, you - like the inventor of chess - want to make this work for you for as long as possible.

Invest $10,000 today and even if you only end up earning an average of 4% a year, plus inflation, in 40 years' time you'll have about $50,000. Earn 7% and you'll have $150,000. Over 50 years those numbers grow to $70,000 and $290,000. Compound this money for 64 years and you'll have somewhere between $120,000 and $760,000. Remember, this is in today's money - in other words, after accounting for inflation.

If I could write a letter to my 20-something self, I'd tell young me to buy stocks with almost every nickel I have.

Actually, I'd go further. If I were in my 20s today, I'd use leverage. I'd use index call options to increase my stock-market exposure. These are much easier to buy today than they were when I was young. With long-term, deep-in-the-money index options, I could double my exposure to the market pretty cheaply. (You can buy options through any regular brokerage account, but the technicalities are a topic for another day.)

Many advisers will tell you this is highly risky. They're right, totally. Doubling your exposure means you will make or lose twice as much. If you do this and the market goes down 50% or more and stays down, you will lose your stake. But if I was in my 20s I'd be taking on this risk to minimize another: The danger that I'd have too little invested in stocks during my 20s.

The problem with investing in stocks is that to make that compounding work for us, we need to invest early and young, but we typically have bupkis and debt at that age. Not until we are in our 40s or even 50s do we have a lot of savings. By then, the power of compounding is dramatically lowered. And by then, we are also much less able to ride out a long bear market because we are nearer retirement, meaning we probably need to keep plenty of money in cash or bonds. That means our returns are even lower.

There is no "risk-free" life strategy. It's just a question of balancing risks. The way I figure it, if I was in my 20s and used options to maximize my market returns, even if I got initially wiped out by a long and devastating bear market, I wouldn't have lost much at all. It would mean that in three or five years' time, when my options expired worthless, the market would be down, shares would be much cheaper and I'd be able to buy more at lower prices. And I figure I'd have more money to invest at 30 than I did at 35, and more at 35 than at 30.

Whether you want to do this is up to you. I can only tell you what I'd do if I was in my 20s with my own money. You pays your money and you makes your choice.

But either way, if you are in Gen Z, the power of compounding should be your best friend - if not forever, then at least for the next 50 years.

-Brett Arends

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May 29, 2025 13:24 ET (17:24 GMT)

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