Youth advised to make early plans for retirement
The last thing many young people want to do with their paychecks is sacrifice part of it for a retirement account, even though tiny contributions made at an early age are all but guaranteed to multiply numerous 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 Mountainside, N.J.-based website AskTheMoneyCoach.com.
For young people in their 20s or 30s, the priorities may be paying rent, making car payments and managing debt related to student loans. But it’s never too early to start saving money.
Pittsburgh 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 percent interest. That individual could expect to have $615,580 at age 60, having invested only $55,000.
“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 Mr. Dresbold, a senior adviser and partner at Signature Financial Planning on Mount Washington.
“Essentially, by starting later,” he said, “you would have $183,826 less despite investing $75,000 more.”
While the stock market rarely hits8 percent on an annual basis, historically speaking, the market has returned an average 8 percent per year since the 1920s. Last year, the S&P 500 was up 12.25percent, Mr. Dresbold said.
He and his partner, Aaron Leaman, at Signature Financial, believe the issue of early retirement saving is an important one for Pittsburgh in light of the younger population of millennial adults being attracted to this area by the universities, medical schools and the burgeoning technology scene.
They host seminars focused on educating younger investors on basic budgeting, saving and how to get started investing throughout the Pittsburgh area at various companies and at their office in Mount Washington.
The most recent data from the U.S. Census Bureau shows continuation of a trend in
which the median age of Allegheny County keeps dropping — from 41.3 in the official 2010 census to 40.7 in estimates made for July 2016. Income-earning adults in this median age group are in the best position to benefit from the magic of compound interest.
“The biggest mistake millennials make is they focus too much on money and not enough on the time,” Mr. Leaman said. “They think about their student debt and paying rent. They care only about the money and they missthe 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.”
All that student debt can be a little distracting, of course. The typical college grad from the class of 2016 owes $37,172, according to Mark Kantrowitz, publisher of Chicago-based Cappex.com, a free website about college admission and financial aid.
Student debt has nearly doubled since 10 years ago, Mr. Kantrowitz said. The graduating class of 2006 left college with an average debt of $20,790.
Millennials also value experiences over things, Ms. Cox said, which is why so many make travel and time spent with friends and family a priority.
According to a Bank of America Merrill Edge study published in May, today’s 18- to 34-year-olds are much more likely to prioritize travel, dining and their gym membership over their financial future. The study of more than 1,000 relatively affluent individuals found that 81 percent of millennials were more likely to spend on travel, 65 percent on dining, and 55 percent on fitness, than saving for their financial future.
“The issue, of course, is that some of them get stuck in a pattern where they’re constantly telling themselves ‘You only live once,’” Ms. Cox said. “With that mindset, it’s hard to be future-oriented because saving for retirement requires an awareness of the need for delayed gratification and a willingness to act on that awareness.”
Saving money takes discipline and for those having trouble in that area, Mr. Dresbold suggests making it an automatic process through payroll deduction, especially when employers offer a 401(k) plan.
“It’stax-deferred money,” he said. “You don’t have to think about it as much. Oftentimes when the money gets into your checking account that money is spent somewhere. You can prevent that from ever going into the checking account and directing it into savings. Payroll deduction just makes it a lot easier for that tohappen.”