Retirement years catch up fast, so start saving now.
by Michael Puente
Brenda Castro says she feels like “just yesterday” when she graduated from high school. In reality, her graduation day was more than a decade ago. “Time sure does fly,” the 30-year-old Castro says. “I've saved some money, but not nearly enough as I should be.”
Castro, a communications specialist for a health-care provider in Chicago, says she contributes to her employer's 401(k) retirement plan, but not as much as she'd like. “I contribute 4 percent every two weeks and the hospital puts in a match,” Castro says. “But I've got a car payment and college loans to still pay off. It's tough to put in too much more. But I don't plan on retiring soon, unless I hit the lottery.”
Castro is actually doing better than others in her age group when it comes to retirement planning. Getting young adults in their 20s and 30s to start thinking retirement is often a tough task.
Several recent studies suggest a vast majority of younger workers do not participate in retirement savings or other tax-advantaged tools such as individual retirement accounts. A survey by Scottrade released earlier this year showed 55 percent of young people have not started saving for retirement, and 64 percent don't even think about it.
And unlike for the Baby Boomer generation, a majority of younger workers these days are not covered by pensions. “The reality is nobody gets pensions any more. And nobody is going to save for you except you,” says Timothy M. Scannell, a certified public accountant and certified financial planner, who is managing director of Scannell Wealth Management Group at High Tower Advisors in Valparaiso.
Scannell's firm administers 401(k) plans for more than a dozen companies in Porter County, which adds up to about 800 employees, with a third of contributors in their 20s and 30s.
Scannell says he hears a lot of reasons why some young folks choose to opt out from contributing to a plan. “The comments I commonly get, which are totally reasonable, are that they are struggling with debt, they have student loans, auto loans, installment loans, credit cards. They say I'm busy paying this down and cash flow is really tight.”
He says it's important for young people to get a handle on their debt, but they also need to establish a pattern of saving. “When you're in your 20s or 30s, you may not be thinking about retirement. But if you can get them to put away $5 per check, you create a pattern of saving. Open a Christmas club or something. Habit is the most important thing. It's all psychological.”
Scannell explains that the benefits of compounding savings over a 30-year period are “pretty powerful.” Scannell often explains to young clients that for every $100 earned, about $60 is left after taxes. He says if you put that same $100 in a retirement plan, the entire amount is there, and perhaps more if an employer contributes to the plan.
Less is more
Mark W. Chamberlain takes a different approach when talking retirement planning to young people. “I try to take the emphasis off of saving a bunch of money to just getting started. I always say: Invest as early as you can, as often as you can and as much as you can,” says Chamberlain, chief executive officer of Lakeside Wealth Management LLC in Chesterton.
Chamberlain says it's harder these days to convince young people that investing and savings is worthwhile, given that the last decade has been a financial rollercoaster that's seen a lot of dips.
“They've seen the financial world fall apart twice in the last 10 years. They've got this background that this is a dangerous place to play and it doesn't do you any good anyway because you haven't made any money in the last 10 years,” Chamberlain says. “It's going to take harder work to make believers out of (young people) versus guys my age, and I'm 51. We've seen a couple boom markets where we know you can make money over time.”
Chamberlain says it's even difficult for him to convince members of his own family about retirement savings. “My daughter is 25. I try to talk to her about retirement and the look on her face is like, ‘Yeah, whatever. I'm bulletproof.' I think it's a generational thing.”
Chamberlain suggests that young adults simply invest 3 percent of their paycheck into a 401(k) plan. “That's 30 bucks a check. You'll never miss it.”
From then on, Chamberlain says, for every raise you receive, put half in your retirement plan and keep the other half “because you've earned it.” “In five or six years, you'll be saving 10 percent of your check. As financial advisers, that's how we guide people. If you save 10 percent your whole life, by the time you retire, you should do OK,” Chamberlain says.
Chamberlain says one of the toughest financial conversations he's had is trying to convince a young client to save a mere $10 a check. “Somebody that's making $10 an hour, the hardest thing to do is talk them out of two Big Macs a week,” Chamberlain said. “But if you do it the right way, you can do it.”
Kenneth V. Krupinski, a certified public accountant and managing partner with Swartz Retson & Co. of Merrillville, says people have to start saving early. “There's not going to be anything left of Social Security when they do finally retire,” Krupinski says. “You have to do something before you get your hands on the money. You have to make sure it comes out.”
Krupinski agrees that young people need not put a lot into a plan to have it start adding up. “It doesn't have to be a big part of their income. Just $50 a month, or $20 a month. It's just to provide that safety net 50 years from now,” Krupinski says. “If you're saving 50 bucks a month right now, in the next 30 years, it could become a million dollars, depending on what the market does and what you invest in. You just need to save something. Don't spend everything; don't buy lottery tickets every week. Save something so at the end of 30 or 40 years, you'll have something there.”
Cal Bellamy, a banker for more than 30 years, says he believes Social Security will be around in the future, but he says, “Maybe not in the same form as it is now. But even if it stays the same, it's never enough to retire comfortably.”
That's why Bellamy, a partner at Krieg DeVault's Financial Institutions, Estate Planning and Business Practice Groups in Schererville, says he knows it's tough getting young people to think retirement. “I hope people in that age group would even read an article on retirement. To have decades to save is the best time.”
Bellamy says there are two key factors to retirement planning: time and consistency. “If you have a long period of time and you consistently put aside for retirement, even stretching a little bit of what you think you can do, that is most likely to succeed. You need time and consistency of contribution,” Bellamy says.
A different philosophy
Terry McMahon, president of McMahon & Associates Certified Public Accountants P.C. in Munster, says one need not worry about saving money early in life if you can't afford it. “It's a good thing but it's not realistic. Most people are trying to get ahead and pay their bills. People have to focus on today.”
McMahon says in many retirement plans, a person must pay a penalty if they try to withdraw it. He says it may not be realistic to tie up that money for the future when you need it today. “To worry about retirement when you're 35, I wouldn't do it,” McMahon says. He adds that it's not too late to start saving if you're in your 40s since “people are working well into their 60s. If you start in your 40s, you'll have plenty of money when retirement time comes.”
Don't fear the stock market
What about news reports of people losing money in 401(k) plans because of the stock market? Our experts say you need not worry if you seek safe investments.
“Stick your money in a money market, fixed account. Not all 401(k) plans are in the stock market. They are in your control. You can ignore all the fluctuations of the market. You don't have to take risks,” Scannell says.
Krupinski says there are certificate of deposits (CDs) or corporate AAA bonds to invest in. “There are a lot of safe investments that are not subject to the whims of the stock market,” Krupinski says.
But Bellamy says if your money is in the stock market, don't become too obsessed over it. “You can take a little more risk in your younger years. There are ups and down. A lot of people stop during a down or uncertain market. That's a big mistake,” Bellamy says. “It's dangerous to try to outguess the market or pull out when it's down or buy only when it's high. These are things that erode your investments and retirement fund.”
Another incentive to enrolling in a retirement plan at work is it looks good to employers. “These employers go through a lot of time and expense to create these plans. They do look and see who is contributing and who is not,” Scannell says. “To some extent, even just contributing does reflect to the employer that you're committed and maybe just a little more responsible.”