In my last post (“Oct 2020 – Financial Literacy”) I discussed the recent survey of financial attitudes for young adults. Here then are some ideas about managing finances which can apply to people of all ages.
Convincing people to save for any goal, whether retirement or a new car is a challenge. It is a good idea but not necessarily what they want, kind of like getting kids to eat their vegetables!
Proof of this idea is that participation rates and deferral rates in voluntary enrollment retirement plans is much lower for younger workers than older employees. Perhaps we should frame the suggestion by saying there are ways to avoid financial mistakes made by the parents. Here are some ideas.
A study by Vanguard showed the average 401(k) participant within 10 years of retirement age (i.e., between ages 55 and 64) has a plan balance of just $69,097. This amount may not provide much help over a retirement of 10 or 20 years. And candidly it is frighteningly low.
Too many workers find themselves behind because they never really addressed the question. So, first you must know where you are going. A MoneyRates retirement plan survey found that 71% of workers within 20 years of retirement age still had not done a calculation of how well their savings will hold up over their retirement years. Doing a rough calculation is not that hard. Avoiding the analysis because you fear the result is not much of a decision process.
Use a retirement calculator only takes a few minutes. Setting up the savings rate for a 401k or IRA takes little time. Then you only need to let it work.
You must control debt because indiscriminate debt can easily undermine many of your financial goals. A dollar in debt can more than counteract the benefit of a dollar in savings.
The Federal Reserve’s Survey of Consumer Finances states that the typical household still has $69,000 in debt other than mortgage by the time the head of that household is within 10 years of retirement. Notice that this figure is remarkably close to the amount previously mentioned for t the average 401(k) balance. In other words, debt can effectively offset a person’s 401(k) savings.
Retirement saving is a big job but is much easier when spread over a long period. Time is an ally. Spreading retirement savings out over 25 to 40 years is much easier than trying to do it in ten years. A catch-up strategy is difficult and unpleasant.
Do not leave free money on the table. Many 401(k) plans offer a match. This offer is a clear and direct financial incentive to start saving now. Employers contribute dollars when the employee contributes. If the employee does not contribute into the plan, they do not receive this money from the employer. There is no retroactive claim to retrieve money foregone from previous years.
Being a consistent 401(k) saver means you claim this money each year. And it is entirely yours once received into the plan.
Saving money is hard work and requires personal discipline. The concept is to let the money and its investment work on your behalf. The investment returns earned become much more powerful when compounded over a long period of time. Compounding means earning a return not just on the original money invested, but also on the returns earned in other years.
A dollar saved at age 30 can equal $10 at retirement age. Clearly time is an ally.
As I have said many times, have a plan. Have a sound strategy based on evidence, not a flimsy promise. Investigate before you invest. May you all have a prosperous future.