Recent studies have shown that a large percentage of young adults under 35 are declining enrollment in employer-provided retirement plans. Considering the economy, it’s understandable that many young adults are finding it impossible to focus on things any further off than paying student loan debt, purchasing a home or vehicle, and getting started in their careers.
Many won’t be financially able to leave their parents’ home until well into their twenties. Even if they’re interested, today’s young adults find it hard to sacrifice a portion of their often meager wages for retirement savings. Especially if they’re barely getting by as it is.
Considering this trend in the next generation, some companies that employ mostly younger adults aren’t bothering to offer retirement plan options and are choosing instead to pay higher wages. While this may be saving companies money and allowing Generation Y or Millennial adults to channel their money into immediate debt-payoff or other savings goals, it’s not encouraging the younger generations to think about and plan for the future.
Market research shows that those who are actively saving and investing for their retirement are in the 35-65 age bracket. But, according to many financial experts, this is alarmingly late in the game. The obvious dilemma is that young adults need to start saving for retirement as soon as possible — while not floundering under other financial obligations. It’s a challenge, but it can be done.
Here are four retirement tips that young adults can start implementing now.
1. Invest early, no matter how small
Time is on your side. Because of the wonder of compound interest, as little as $200 a month invested in your twenties can build to millions by the time you retire. But realistically, how many young adults in our economy have $200 a month to put into retirement savings?
The recommended allocation for retirement savings is 15% of your income, but this is often an unrealistic number. The key is to stop worrying about percentages and focus on saving something. Even small contributions to a 401K or Roth IRA when you’re young will put you much further ahead. You can always invest more heavily once you’re in a better financial situation.
2. If your employer doesn’t offer a 401K, open an IRA
If your employer offers a 401K, you should undoubtedly participate. Most employers match your contribution, sometimes up to 100%. Investments are before-tax and non-taxable, unless you withdraw them early.
If they don’t offer a 401K, consider opening a Roth IRA. Although investment companies usually require a minimum amount to start an account, many are catching on to the needs of young adults and waving the minimum as long as you agree to regular contributions. Again, the amount isn’t as important as the fact that you’re saving something.
3. Keep your 401K untouched
When you’re strapped for money, it can be tempting to consider your 401K funds as just another savings account to withdraw from in an emergency. But if you do so, you’ll be paying a 10% early withdrawal fee, plus a heavy fee of up to 20% to your employer for income tax. The amount you’ll receive is not worth the amount you’ll lose.
If you change jobs, your new employer might allow you to roll your previous 401K over into theirs. If not, you should open a rollover IRA and transfer the funds to that.
4. Remember that the future is important
Don’t get so caught up in the present that you neglect to plan for the future. This is one of the greatest failings of the two youngest generations. The transition into adulthood and financial independence is becoming more difficult in the present circumstances — but neglecting to plan for the future can result in a lack of financial independence later in life. Don’t be discouraged if you can’t save much right now; saving something is always better than nothing.
Young adults, how have you begun saving for retirement? Any tips?
- E*TRADE IRA - Official Site