A New Year's reflection on the miracle of compound interest

The Religious Investor
The Boundaries Blur; The Boundaries Clarify
by Archdeacon Stringfellow
4 January 2010

The religious investor faces particular tensions and opportunities with the arrival of the new secular year on January 1. Beginning once again are the commitments to give, perhaps even to tithe, to a parish and to give as well to the new annual cycle of continuing commitments to multi-year capital campaigns such as the Diocese of Bethlehem’s New Hope Campaign.

Beginning again is the new tax year’s charitable contributions whether as part of the “standard deduction” or as part of an itemized list whose total may far exceed the standard amount and whose total will substantially reduce tax liability for the year.

And while the new year signals new opportunities for giving, it signals additionally a new cycle of opportunities to fund maximally an individual retirement account (IRA). Those who are employed by 501(c)(3) tax-exempt organizations (I think especially of the clergy and lay employees of parishes and the diocese) have also the opportunity to fund maximally a 403(b)(7) salary deferral account.

All of this begins at the first of the year, and the challenges may be daunting. Does it really matter which of the “opportunities” one pays first and which one pays later on?

It matters greatly. The parish and other charitable organizations have cash-flow issues at all times. Enough cash must come in each month to pay the month’s obligations. The issues may become serious if more than a handful of pledgers and donors defer gifts until the middle or end of the year. This issue comes to the fore for all to see when treasurers remind pledgers in newsletters and service leaflets “to keep their pledge up to date” before embarking on a summer vacation.

And it matters greatly to your IRA account and to your salary deferral account. The current T. Rowe Price Investor does the math regarding IRA account contributions. (Let me hasten to issue the necessary disclaimer: I have no investments or accounts with this company, and I am not encouraging investments with it.)

We are allowed fifteen and a half months to fund maximally an IRA account ($5000 if you are less than 50 and $6000 if you are not), from January 1 to April 15 of the following year.

If you fully fund the account in January of each year, you will accrue $25,746 more than if you fully fund the account in April of the next, but the same contribution, year, assuming 8% annual growth for twenty years compounded monthly. 8% annual growth is a significant assumption, to say the least, though in 2009 the S&P 500 Index rose 19.67%, a very healthy rate, from 931.80 to 1115.10, despite a nerve-testing steep decline in the first quarter.

A difference in return of nearly $26,000 in an IRA account seems staggering just for investing earlier rather than later, but the amount indicates the “miracle” of compound interest. From something comes 8% more annually, according to the example, if you assume the attending risks and if you have the required steadiness simply to watch as the markets fluctuate and generally reward the “faithful.”

And if it’s true for your IRA account, it’s true also for parishes and capital campaigns that invest rather than spend your contribution. Giving early means that your gift compounds in accord with the current rate of return.

I am thinking particularly of the New Hope Campaign whose funds are both distributed and invested. Funds are distributed according to our commitments and promises to support construction of the college and primary and secondary schools in Kajo-Keji, and to support projects by parishes in the Diocese to benefit the needy of Northeastern Pennsylvania. Funds, also, are invested, as the cash flow and generous donors allow, in the Diocesan Investment Trust to ensure financial support for the schools in Kajo-Keji and the projects to benefit the needy of Northeastern Pennsylvania for years and years to come.

Your gift to your retirement plan and to a capital campaign can continue to give and to make a difference for a long, long time.

And so, amid so many legitimate claims upon your money throughout the year, how do you decide upon your priorities? I can only say to you that long before I was ordained and began to minister at the altar and at the finance meeting that I was given an unlooked for dividend of clarity: I intend to give throughout my life and afterwards as well.