Using another simple example: Suppose a forty-three year-old father bleeds off $5,000 from his net worth through poor planning over the previous decade. He makes changes to stop future bleeding, but the opportunity costs continue to accumulate on his previous missteps. Assuming he lives to seventy-nine, and using the 8 percent annual rate, the opportunity cost calculation grows to $40,000.
Suppose this man has a daughter, aged sixteen when he is forty-three. At her father’s death, she stood to inherit his assets. Theoretically, his lost opportunity cost is passed on to her, in the form of money she doesn’t receive (the daughter is fifty-two at her father’s death). If she lives until age eighty-six (and women usually live longer than men), the opportunity cost has now reached $640,000. Take this same calculation out one more generation, and the cost of the loss is well over $3 million. Lost opportunity cost is hypothetical, but the consequences are real.
You might dismiss this opportunity cost calculation as mere speculation. After all, opportunity cost isn’t real, right? It’s a hypothetical assessment of what something might have been worth if you had it—and you don’t. But here’s the chilling part: Even if the math is hypothetical, the lost wealth effect is real. Here’s a quote from a May 13, 2005 Wall Street Journal article by David Wessel:
A substantial body of research finds that at least 45 percent of parents’ advantage in income is passed along to their children, and perhaps as much as 60 percent. With the higher estimate, it’s not only how much money your parents have that matter—even your great-great grandfather’s wealth might give you a noticeable edge today.
Wow. Not only is good financial planning about making things better right now, it also affects tomorrows that are far beyond your own retirement. This is not to say your children are doomed by your financial missteps, nor does your good planning ensure financial success for your dependents. But the consequences of your financial decisions can be far-reaching.
Given these perspectives, no one with financial aspirations—for themselves or their future generations—has the luxury of procrastinating. The time for planning—and acting—is now. Procrastination is the stealthy killer of financial success.
By Nancy M. Ogilvie, Financial Strategist
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