Start thinking about retirement while in your 20s, experts advise
Tom Smart, Deseret News
SALT LAKE CITY — Retirement is a distant concept for most 20-somethings, whether they’re busy enjoying post-graduate life, forging ahead in careers, playing video games in their parents’ basement or still trying to make it as a singer-songwriter.
However, young adults need to start thinking about retirement and taking steps in their 20s — even early 20s, according to financial experts.
“Stop thinking you’re too young to get started,” advises Mike Lyon of First Command Financial Services in Layton. Why? “Because of the time value of money and the pure loss that comes from every single year that you wait.”
Only a quarter of workers between the ages of 20 and 29 are saving, according to a 2013 study by Aegon, Transamerica Center for Retirement Studies and Cicero Consulting.
And the average American retiree has less than $50,000 in savings and investments, according to a 2012 report from Employee Benefit Research. Typically, you’ll need a minimum of $500,000 in your portfolio to be sustained during post-retirement life.
“Starting early is a huge, huge, huge benefit,” said Steven Tolley, a financial adviser with Edward Jones Investments in Orem.
Using Dodge & Cox stock for an example, say a man invested $2,000 a year during his career through 2013.
If he began saving in 1984, he would have put in $60,000 and ended up with $487,066. Yet if he had begun saving at the start of his career in 1974, he would have put in $80,000 and ended up with $2,064,702.
The difference between the fund’s amount after 30 and 40 years is significant. Even more, Tolley said, young people should realize that pensions probably won’t be there for them, and Social Security will probably be in a postponed or taxed state.
The numbers seem convincing, but people like 26-year-old Leesa Allison, of Salt Lake City, say retirement seems far away. She has a 401(k) started but admits she doesn't know much about it.
"I am winging it. I live the New York mentality, which is get money and spend it," Allison said. "I know I should be saving and doing all of that stuff, but it's hard to figure out what to do and I don't know what resources to use. Also, it just doesn't seem like it matters very much. Maybe that's being young, naïve, not having a lot of health problems or bills to pay yet."
Financial advisers say everyone needs to take certain steps.
1. Establish good habits. “If you have good habits when you’re not making money, then you’ll have good financial habits when you are,” said Ray LeVitre, a certified financial planner at Net Worth Advisory Group in Sandy.
Bad habits, like not saving enough and having too much debt, are likely to continue even when you are making more money. Good habits are key to healthy finances.
LeVitre said you will be wealthy — meaning you have enough assets to sustain you when you quit working — no matter your income, if you have good habits.
2. Make a plan. Developing good habits goes hand in hand with developing a plan for building your portfolio of insurances, investments and cash. Lyon said people can’t just wing it with finances but should meet with a financial adviser to make a plan, and then to review the plan every year.
Financial planners aren’t free, but many will waive planning fees for a young adult setting up a base plan. As the adage goes, if you fail to plan, you plan to fail. Start with a yellow notepad, at least.
According to the 2011 HSBC global report, people who plan have $31,087 in non-retirement savings and investments compared to non-planners, who have $9,733.
3. Start saving. Begin saving now and save consistently. You’ll enjoy compounding interest and need to put less in to meet your goals for retirement savings.
Most financial advisers recommend saving at least 10 percent of your income in your 20s, but Tolley said the amount should be determined by how much money you would need if you were 65 and retiring today.
U.S. Department of Commerce Bureau of Economic Analysis reports show that the average personal saving rate as of September 2013 was only 4.9 percent of disposable personal income.
4) Set up Roth funds. Build up some cash and an out-of-sight emergency fund, but also make sure you have some sort of Roth account, whether it’s a 401(k) or an Individual Retirement Account.
Most companies will offer a 401(k) plan, which deducts retirement savings from your paycheck up to $17,500 annually for 2013.
If there’s an option between Roth and traditional, young adults should almost always take the Roth option. With traditional accounts, you have tax-deferred savings. You don’t pay taxes up front, but you are taxed when you take it out.
Assuming you’ll be in a higher tax bracket when you retire, you’ll probably want a Roth account. This means you pay taxes up front and enjoy tax-exempt savings after decades of tax-free growth.
Many employers will match the amount you choose to have deducted for your 401(k), often up to 4 percent. LeVitre suggests workers absolutely make the full match — no question.
“The single highest priority they should be doing is getting the match,” Tolley said. “I’m surprised whenever someone refuses free money, and they need to look at that match on their 401(k) as a bonus, something extra, free money.”
If you don’t have a Roth 401(k) or have already fully funded it, get a Roth IRA. The account is similar to a 401(k) except the limit is $5,500 annually for 2013. If you have a traditional 401(k), get the match, fully fund a separate Roth IRA, and then go back and put money in your traditional 401(k).
“They should get used to and try to condition themselves to make the money disappear. That seems to work the very best,” Lyon said. “Young adults of that age should start to condition themselves to automatic investments that withdraw monthly or biweekly automatically without any kind of effort on their part.”
5. Follow a budget and eliminate debt. To follow a budget, you need to make one first. And no, just trying to spend less than you make does not count as a budget. Financial advisers recommend sites like Mint.com to help you control your spending.
Eliminate consumer debt as quickly as you can. Chip away at student loans, too, but they’re a lower priority because their interest rates are so low.
It makes sense to start on the loans with highest interest rates, but start with the smaller debts you can pay off quickly, if it will help you build momentum. LeVitre recommends snowballing your debt. Work toward paying off your highest priority. Once that’s paid off, take that payment and add it to the payments you’re already making on the next priority, and so forth.
LeVitre suggests cutting up credit cards and using debit cards instead, so there’s simply no way to overspend. If you don’t have debt and are worried about building up your credit, use a charge card.
Like a credit card, a charge card gives you an advance, but you have to pay it back every month. A charge card’s annual fee of $50 to $100 a year is worth the guarantee that you won’t get into any more debt, he said.
6. Consider going back to school. Education is worth the debt, and more education can increase your lifetime earnings.
A study by the Georgetown University Center on Education and the Workforce researched lifetime earnings by degree earned. For 2009, median lifetime earnings were $1.3 million with a high school diploma, $2.27 million with a bachelor’s degree, $2.67 million with a master’s degree, $3.25 million with a doctoral degree and $3.65 million with a professional degree.
“For sure to finish your degree, bachelor’s or master’s,” LeVitre said. “Basically the best thing you can do for yourself is get an education.”
And that goes for educating yourself about finances, too.