Guest Blog | When Should You Start Planning for Retirement?...Today!
It’s not you. Well, at least it’s not ONLY you. It’s the Gen Y dilemma. We get a bad rep for having our head in the clouds, feeling disconnected from the reality of putting in work, spending impulsively, and now being disinterested in saving for retirement. There is a lot of speculation about social security and where it will be (if it will be) when we reach retirement age. There is a lot of uncertainty.
The truth? We young professionals/millennials DO have it rough, at least compared with our recent predecessor generations. In part, we have the Great Recession to blame for things being slow in the career development department and our late start in the working world. We are being crushed by student debt and wages have been stagnant for college grads since the early 2000s. Turns out that graduating from school into a down economy impacts earnings and job opportunities for up to 15 years down the line. A Yale study conducted by Joseph G. Altonji found that those who graduated between 2004 and 2011 have had a tougher time in the market than previous recession graduates. Is it any surprise then that Gen Y is impeded in trying to plan for life at the end of the same careers we are having a hard time moving forward in?
But it’s not all glum and not all is lost. Young savers do, in fact, have some advantages. For example, those young professionals who have landed a job that offers a retirement plan might have more advantages than previous generations. Automatic enrollment and auto-escalation (where your contributions increase automatically over a period of time) can help make a big difference in starting people on their way to saving and encourage them to effortlessly keep saving.
Another advantage is that as of 2005, some Retirement Plans began to offer a Roth account option in their plan. Now, more and more plans are offering it and advisors tend to recommend that investors in their 20s and early 30s take advantage of these after-tax contribution options. What’s the big deal? Roth contributions are taxed now, right when you get your paycheck, at the current tax rate. When you’re ready to draw the money from your account at retirement age, the money comes out tax-free (whereas you would normally be taxed on it at withdrawal). This means that while you are young and are likely in a lower tax bracket than you will be later on in your career, you are paying taxes will likely be lower than the tax rate and tax bracket of your future self.
Also, investors in 401(k) plans today generally have more opportunities to diversify, due to regulations that are helping ensure that corporate retirement plans are well-monitored by the plan sponsors and advisors, who are both legally responsible for the quality of the plan. An advisor can either assume or share fiduciary liability. For example, a 3(38) investment manager assumes fiduciary responsibility with respect to investment selections, investment fees, etc., but does not share or assume responsibility for the plan “structure” (this is the obligation of a 3(16) fiduciary- typically the plan sponsor). In addition, the new Rule simply establishes a broad definition of a fiduciary that now encompasses individuals providing brokerage retirement services, not just advisory. A fiduciary must act solely in the interest of the participants and their beneficiaries, and not just in regards to investments and fees.
And finally, as a young investor, you must remember that time in the market makes quite a difference. If you begin investing in your 20s, time is significantly more on your side than if you try to invest enough to catch up in your mid to late 30s, for example. If you invest a small portion of your paycheck earlier on and keep your money invested over time, your savings have the opportunity to grow more than if you try to play catch up by making a larger contribution later on in your career.
In short, although things are less certain for our generation, we also have some big opportunities for ensuring our future. Mike Gheen of Oswald Financial suggests you consider taking these actions to be smarter about saving:
- Take advantage of financial education opportunities offered at work through your company plan’s advisor or record keeper. Find out if your plan’s adviser will offer you a one-on-one consultation. If your job offers a Financial Wellness program, take advantage of the assessments and online tools to see where you stand.
- Prioritize and manage your debt, which starts with making and sticking to a budget. Pay off your high-interest debt first, save up for big purchases, and create an emergency fund to avoid expensive borrowing in case of an emergency.
- Start contributing to your company’s 401(k) today to maximize the potential of your time in the market. Your goal should be to at least contribute the percentage required to make the most of the company’s match, if one is available. If you’re unable to contribute that much just yet, work towards it by increasing your contribution every year, even if it’s by 1%.
By: Mike Gheen (Practice Leader- Wealth Management) and Maria Stenina (Asst. Manager of Marketing and Operations) at Oswald Financial, Inc.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. A Roth 401(k) offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.
Future tax laws can change at any time and may impact the benefits of Roth 401(k)s. Their tax treatment may change. Investing involves risk including loss of principal.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Oswald Financial, a registered investment advisor and separate entity from LPL Financial.