What young workers need to know about RETIREMENT SAVINGS
Young adults newly introduced to the professional arena may not immediately be thinking of the future when their careers will come to a close. Retirement may seem like a distant goal when it’s 50 years or more away. However, pushing off retirement savings because it is not viewed as a necessity could turn out to be a significant mistake.
According to Mass Mutual, the economic disruption caused by the global pandemic pushed retirement to the bottom of many workers’ lists of financial priorities. That was especially so among young professionals. A 2019 survey found roughly half of millennial and Generation Z professionals believe they are not saving enough for retirement. Student loan burdens are another reason why certain people may delay saving for retirement until they are older.
Young workers need to get the facts about retirement. For example, The U.S. Social Security Administration says that Social Security taxes that people now pay into the Social Security Trust funds that used to pay benefits to current beneficiaries, not future ones. The Board of Trustees estimates that, in 2041, and based on current law, the Trust Funds will be depleted since people are living longer and the birth rate is low. The taxes being paid now will not be enough to pay the full benefit amounts scheduled for future retirees.
Young people can no longer rely on Social Security benefits to finance their retirements in the United States. Rather, young workers need to be proactive and take control of their own retirement savings.
• Experts advise following the general rule of saving 10 percent to 12 percent of your salary when you are in your 20s, including factoring in any employer match.
• Working for companies that offer defined-contribution plans like a 401(k) or 403(b) can make it easier for young professionals to begin saving for retirement.
• Setting aside a portion of your income early on in retirement savings ensures more years of savings and investments will benefit from decades of compounding.
• Those who contribute to a retirement plan may receive an immediate tax break because the contributions come out of paychecks before taxes are withheld. Many of these plans also offer the advantage of tax-deferred growth. This translates to not being required to pay taxes each year on capital gains, dividends or other yield distributions if the money is not withdrawn before age 591⁄2 . Speak with a financial advisor to learn more about tax-advantaged accounts.
• T. Rowe Price says there are certain benchmarks that can help people save enough money for retirement. By age 30, you should have .5 times the amount of your salary. At age 35, that amount should increase to 1.5 times your salary. These numbers are based on an assumed retirement age of 65 and with a household income growth of 5 percent until age 45 and 3 percent thereafter.
• According to research from Qualtrics, young workers don’t plan on working until they can receive full benefits from Social Security. Twenty-four percent plan to retire early, and 41 percent want to do so by the time they turn 50. That could spark more ambition among younger generations to save for retirement and to save more aggressively.
Even if retirement is many years in the future, young workers need to start saving for retirement early on to be able to retire comfortably.