The average cost of a wedding in the United States in 2017 was $25,764. ($99 divorces are even more expensive, in their own way, but that’s another story.) The median cost was about $15,000. That means that half of the couples who got married in 2017 spent less and half spent that much or more.
But Paul Merriman, writing for CBS MarketWatch has a better idea: When he heard a friend of his was planning to spend $40,000 on his wedding, his friend joked that Paul would say “spend $1,000 on the wedding and put $39,000 into a Roth IRA that earns 10 percent for 40 years.”
Well, it started as a joke, but Paul launched an interesting thought experiment:
Paul started with the following assumptions: A 25-year old bride who retires at age 65, and assuming a 10 percent rate of return (yes, yes, we know. 10 percent is a stretch these days, with conventional assets, but lots of Self-Directed IRA owners can make it happen) and investing that $39,000 into a Roth IRA at a clip of $5,500 every year (the statutory maximum).
The long-term opportunity cost of a $40,000 wedding instead of a $1,000 wedding, calculated over 40 years, amounts to $1.77 million.
In other words, every dollar spent on the wedding (or anything else at age 25) has a long-term cost of $45 for every dollar spent.
It gets better: Merriman continues the calculation. Assuming she pulls in her risk exposure in retirement and continues to earn a 7 percent rate of return on her portfolio and withdraws 4 percent per year, she would receive $3.21 million – tax free – in retirement income over 30 years, until she turns 95.
Her Roth IRA balance at that time would be $3.95 million, for a combined $7.16 million.
In other words, a $1 cup of coffee at McDonalds for a 25-year-old has a long-term opportunity cost of $183 over a time horizon of 70 years.
That’s the mathematics of it. But people are not computers. Life is short, and weddings are important. If she (or he!) wants a bigger wedding, do the bigger wedding – within reason.
But show them this article first and let them make an informed decision!
Interested in learning more about Self-Directed IRAs?
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Self-Directed IRA Success Story
Mitt (71) and Ann (69) elected to use a Self-Directed IRA structure to hold an interest in a private equity firm Mitt founded. The couple was attracted to the IRA structure because they were in a high personal tax bracket, and an IRA allowed them to shelter both dividend and capital gains income from federal taxes every year. They could then reinvest every dollar to let it compound year after year. Federal taxes, for most of the investing period, were just under 37 percent for them – so any income tax breaks they could get would be very valuable.
They were attracted to the Self-Directed IRA structure because Mitt had exceptional acumen as a businessman and investor, and the self-directed feature allowed him to take personal control of how the money was invested, rather than delegate that task to a money manager charging a fee to get inferior results.
This guy with the plaid pants and the bowtie used a Self-Directed IRA to amass tens of millions.
The Self-Directed IRA structure was flexible enough for him to hold his company in the form of a limited partnership, which provided more tax advantages for those in higher tax brackets. Specifically, the partnership structure allowed the partners to assign different ownership rights to different classes of investors – something the C corporation form does not allow for.
With the judicious use of leverage, and frequent turnover, the couple managed to grow their Self-Directed IRA into somewhere between $20.7 million and $101.6 million, according to federal filings.
You may have heard of them.
We do not know what the long-term rate of return was on the Romney’s Self-Directed IRA holdings, though it was obviously pretty good.