Financial literacy needs to start young

Before the close of Financial Literacy Month in April, let’s talk about financial literacy engagement. Perhaps you know someone who is graduating from college or starting a first job. Or you may know someone who is midcareer and leading a busy life sandwiched between the needs of children and parents. You may even know someone who is getting ready to retire.

What’s the commonality among these diverse groups? The need to know how to make sound financial decisions generally and, from my point of view, the need to prepare for retirement. When asked, retirees often report that their biggest regret is not starting to save early enough. That regret can be avoided.

As professor Annamaria Lusardi tells her personal finance students, “Young people need financial literacy because they have a great asset: time, and they should use it to start on the path to financial security and success.” Lusardi teaches at the George Washington University School of Business. Among her many awards, she is the recipient of the 2007 Fidelity Pyramid Prize, given to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans.

Here is a data point that you can share with the young people in your life:

If you save $100 a month over a 40-year career and invest that in an S&P 500 index fund within a taxdeferred vehicle such as an IRA or, better yet, a 401(k), here is what history tells you:

In the worst 40-year period since the 1920s (1934-74), your $48,000 ($100 a month for 40 years) investment grew to about $500,000 (9.6 percent annualized). The best 40-year period (1959-99) grew to $1.4 million (13.5 percent annualized). The recent 40-year period (19782018) ended with about $640,000 (10.5 percent annualized return). These are pre-tax returns.

But if you invest the same $100 a month through a 401(k) at work with a dollarfor-dollar match, the same investment of $48,000 grew to between a low of about $1 million (about 18 percent annualized) and $2.8 million (about 21 percent annualized).

Young people can reasonably expect a result within these boundaries if they do the same. Some of them already know about the value of 401(k)s, as I can attest by sponsoring the first 401(k) Champion Award. The award winners, who will be announced Monday, have proven to me that mentorship is the key to success.

Here is what some of the finalists said about how they started on the path to saving for retirement at a young age.

A.C. worked at a nonprofit in college that offered a safe harbor plan. She says: “(I) could not be prouder of myself for starting to contribute at 18. Even though it was a tiny amount I was putting away, I know it will grow to be so much more by the time I retire.”

C.O. said his parents guided him: “My parents told me in my teens about how their companies matched their 401(k) contributions. I learned more through independent research after a company-wide presentation about our new retirement plans.”

K.D. said her mother was her mentor: “My mom is a CPA and taught Junior Achievement at my elementary school. She always stressed the importance of saving, whether it be for a car, school, a house, retirement and/or emergencies. She taught me that in the past, many companies offered pensions and sometimes 401(k)s on top of that, and that these days, companies are no longer offering pensions, and are instead encouraging their employees to save for their retirement via the company’s 401(k)s.”

A.S. was 16 when he started his first job at Nordstrom. “When I was filling out my paperwork, my department manager explained to me that I absolutely had to contribute to the 401(k). He patiently explained the company match and took the time to show me how different contribution percentages would affect my take-home pay. When I realized that my take-home pay would only be a few dollars less and I would also get ‘free’ money in the form of a company match, I was hooked. If he had not taken the time to explain it to me. ... I am confident that I would be years behind in saving. I set my goal of $1 million dollars by age 65 and am happy to say that I should easily double that goal well before then!”

If you would like to know more about the winners of the 401(k) Champion Award, go to my website on Monday ( juliejason.com/ awards). Champions have demonstrated an understanding of the benefits of their 401(k) accounts and are equipped to share that knowledge with their peers. Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.