Why young people should plan early for retirement
Millennials need to know the benefits of compound interest
The last thing many young people want to do with their paycheques is sacrifice part of them for a retirement account, even though tiny contributions made at an early age are all but guaranteed to multiply many times as the years go by.
“If they’re saving for anything, it might be a trip or some short-term objective. But typically socking money away for a retirement that’s decades away isn’t high on the list of goals,” said Lynnette Khalfani Cox, founder of the AskTheMoneyCoach.com.
For people in their 20s or 30s, the priorities may be rent, car payments and/or repaying student loans. But it’s never too early to start saving money.
Financial adviser Seth Dresbold illustrates the power of compound interest by assuming a person were to invest $5,000 a year between the ages of 25 to 35 at 8 per cent interest. That individual could expect to have $615,580 at age 60, having invested only $55,000.
Rising interest rates will have affect bonds for the foreseeable future. Bond exchange-traded funds carry more risk than individual bonds. They trade like stocks, and investors can lose principal.
“If that same individual instead started investing $5,000 a year every year beginning at the age of 35, and continuing until the age of 60, he or she would expect to have $431,754 at age 60, despite having invested a total of $130,000,” said Dresbold, a senior adviser and partner at Signature Financial Planning.
“Essentially, by starting later,” he said, “you would have $183,826 less despite investing $75,000 more.”
While the stock market rarely hits 8 per cent on an annual basis, historically speaking, the market has returned an average 8 per cent per year since the 1920s. Last year, the Standard & Poor’s 500-stock index was up 12.25 per cent, Dresbold said.
“The biggest mistake millennials make is they focus too much on money and not enough on the time,” said Aaron Leaman, Dresbold’s partner at Signature Financial. “They think about their student debt and paying rent. They care only about the money and they miss the aspect of the time.
“Even if you just put away $20 a month, if you’ve got 30 years until retirement, it compounds and it grows so much more by the time you retire.”
Student debt can be a little distracting, of course. The typical college graduate in the U.S. from the class of 2016 owes $37,172, according to Mark Kantrowitz of Cappex.com.
Millennials also value experiences over things, Cox said.
According to a Bank of America Merrill Edge study,18 to 34-year-olds are much more likely to prioritize travel, dining and their gym membership over their financial futures. The study of more than 1,000 relatively affluent individuals found that 81 per cent of millennials were more likely to spend on travel, 65 per cent on dining and 55 per cent on fitness, than saving.
“The issue, of course, is that some of them get stuck in a pattern where they’re constantly telling themselves ‘You only live once,’ ” Cox said. “
Saving money takes discipline and for those having trouble with that, Dresbold suggests making it automatic through payroll deduction.
“You don’t have to think about it as much. Oftentimes when the money gets into your chequing account that money is spent somewhere. You can prevent that from ever going into the chequing account and directing it into savings.
“Payroll deduction just makes it a lot easier for that to happen.”