The new face of retirement: Saving strategies for Generation Y
There is no question — the face of retirement is changing. Those in politics and the media bombard us with debates over the questionable longevity of Social Security. Corporate pension plans that previous generations took for granted are becoming less reliable. So, what does all of this mean for the youngest members of our country’s workforce and their strategies for building a retirement savings portfolio? It magnifies the importance of taking responsibility for their financial security in retirement.
What is Generation Y?
Generation Y is generally considered to be those people born between 1977-94.
Comprised of more than 65 million people, Generation Y — also referred to as Echo Boomers or the Millennium Generation — is generally considered to be those people born between 1977 and 1994. A considerably larger group than Generation X, they are the biggest wave to hit the American demographic scene since the 72 million Baby Boomers.
Generation Y’s thoughts on retirement
A recent survey conducted this year by Hewitt Associates (“Three Generations Prepare for Retirement,” February, 2006) revealed that 56 percent of Generation Y workers say they rarely or never think about retirement saving. In fact, just 31 percent of Generation Y employees who are eligible to participate in their employer-sponsored 401(k) do so (compared to 63 percent of Generation X and 72 percent of Baby Boomers). The average Generation Y participant contributes 5.6 percent of pay — less than is required to obtain the common full company match of 50 cents on the dollar up to six percent of pay.
Generation Y cite financial constraints such as day-to-day needs (78 percent) and lifestyle purchases (61 percent) as the primary obstacles that prevent them from contributing to a retirement savings plan. Most (63 percent) say they “don’t have enough information and really don’t know what to do” to manage their retirement accounts. The majority (81 percent) of Generation Y workers believe they will fund retirement through savings they put away at a later date. Hence, the problem: putting off getting started.
Understanding the importance of saving early and robustly
When you are young and time is on your side, the power of compounding is truly incredible. Even small retirement plan contributions will grow exponentially. Delaying years — or even months — can significantly reduce the return on an investment.
Consider this example: Jane begins investing $100 a month in her employer-sponsored 401(k) plan when she is 25 years old. Mark does the same — only he begins when he is 35 years old. Assuming a nine percent annual rate of return compounded monthly, when Mark retires at 65, he’ll have $183,074. Jane will have $468,132 — more than 2 times Mark’s total. You can see the power of compound interest.
Finding a healthy balance
Admittedly, those just starting out in the workforce face significant obstacles such as loan payments, high rent and lower wages that prevent them from vigorously saving for the future. However, since Social Security and traditional pension plans may not be available, those in Generation Y need to explore alternative strategies for building their own retirement nest egg.
Pay yourself first
Enroll in your employer’s 401(k) plan and automatically invest a certain percentage of your income each paycheck. Some companies have established plans in which employees are automatically enrolled in the 401(k) and must opt out if they don’t want to contribute. While this can be a great way to get started saving for retirement, many automatic enrollment plans invest a significant portion of assets in stable or low-risk investments — minimizing the chance for larger returns.
To make the most of the return on your investment, you’ll need to consider the degree of risk you are willing to accept. The more time you have until retirement the greater risk you can afford to take. If you aren’t sure where to begin, consider looking at target retirement funds. These funds take into account the length of time you have until your target retirement date. Early on, your money is invested primarily in stocks to encourage growth. As you approach retirement, your portfolio is shifted to include more conservative investments to protect your assets.
Taking charge of your retirement portfolio can be overwhelming, so developing a relationship with a trusted financial advisor may go a long way toward establishing smart money management techniques. A professional financial advisor can help you estimate your retirement needs and develop a plan to accumulate a retirement fund to help provide the income you will need. The sooner you start saving and investing, the better off you will be in the long run.
This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor.
info: 704-987-9794 . email: lynn.j.davidson@ampf.com
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