Society says there is a logical progression to “growing up.” You study hard, finish school. You make it through a copious number of interviews and land your dream job. You quickly realize you are an adult, but the thrill begins to wear off as you sit down with an HR manager to talk through the benefits your employer is offering and that you are now responsible for enrolling in. Your body slumps into a benefits-induced coma as the manager casually flips through forms, summary plan descriptions, and enrollment guides. Phrases such as “deferral percent,” “FSA,” “deductibles,” “beneficiaries,” and “investment model” begin to make your heart race and your head spin.
The Boomerang Generation
Unfortunately, this is a best-case scenario for many twentysomethings. Every generation has its own set of challenges and adversities to conquer, but the current crop of so-called Millennials faces a uniquely challenging environment. Of those who graduated college between 2006 and 2010, 14% cannot find full-time work,1 and only 55.3% of young adults ages 16-29 have jobs,2 which in turn leaves retirement planning sitting at the bottom of most to-do lists. Even those with jobs are likely thinking about how to hold onto them or about what the next job will be—not about retirement. On average, people now in their twenties will go through seven jobs in their lifetimes.3 Long-term financial security is not their primary objective.
These endless job struggles have resulted in a generation that is seeing record numbers move back home with their parents following college.4 As a result, the Millennials have acquired a nickname as the “Boomerang Generation.” In general, the young adults that make up the Boomerang Generation take longer to live alone, finish college, get married, and find a steady job or career.
Where to start?
Every Millennial has heard the paternalistic “you have to save everything you can for retirement” speech delivered by someone who cannot relate to current salary or economic situations. Realistically, retirement planning isn’t the first thing on everyone’s minds.
But while you don’t have to save everything you can today, it’s important to get started. If you keep thinking “it can wait until later,” you’ll wake up one day when you’re 55 and find yourself scrambling to figure out how you’re going to live in your retirement years. Don’t let that be your future. Take a few minutes and start contributing and planning for your retirement today.
Here are some practical suggestions for people in their twenties as they dive into retirement planning:
1. If your employer offers a plan, get to know it.
You don’t need to work in employee benefits to be knowledgeable about your company’s plan, and you don’t need to know it inside and out. But you should be able to answer these simple questions:
- What kind of plan–401(k), 403(b), profit sharing, defined benefit, cash balance, other?
- Are you taking full advantage of your company’s 401(k) match?
- Does your plan offer the ability to make pre-tax contributions or Roth contributions?
- When will you be eligible for the plan?
- Will your employer automatically enroll you with a set deferral percent if you don’t make an affirmative election one way or another?
- What type of investment options does it offer?
- When can you begin to contribute?
- When will you be vested?
2. No one else is going to fund your retirement…contribute, contribute, contribute.
Access to a defined benefit pension plan is very rare for people in this generation. Millennials are at the forefront of the generations who will need to fund their retirement solely on the basis of what has grown in an individual retirement account (IRA), 401(k), or some other plan to which they must contribute. Even though your budget may be tight, every dollar you can spare now could be worth much more by the time you retire. While most will recommend that you contribute the maximum amount possible, it’s not realistic for people who make $30,000 to contribute $17,000 into a 401(k) each year. Figure out how much money you can spare each pay period after you pay your expenses, and contribute what you can. There are online calculators to help you understand the impact on your paycheck. Don’t be discouraged if you can only save $10 or 1% of your compensation. You’ll be glad you made the effort when you’re nearing retirement. The longer you have your contributions invested in the market, the longer you have to take advantage of the compounding of interest on your investments.
3. Consider Roth.
Roth deferrals are contributions made to the plan on an after-tax basis. Unlike deferrals that are made on a pre-tax basis and are taxable with interest at retirement, Roth contributions are made after the taxes have been taken from your pay and will be distributed at retirement tax-free. In addition to taking out your contributions tax-free, you will also be able to withdraw the earnings on your investments tax-free, assuming you are at least 59 and a half years old and have had a Roth account for at least five years. This may be a good choice for you now when you’re in a lower tax bracket. In essence, the taxes paid while you are working may be less than if you contributed on a pre-tax basis and paid the taxes in your retirement years in a higher tax bracket. If you aren’t sure whether to contribute Roth or pre-tax dollars, it’s always wise to speak with a tax advisor.
4. Increase your deferral percentage every time you receive a raise.
You were surviving on your income prior to the raise so you’ll manage without seeing the extra income hit your bank account. Think of it this way: If you never see the money, you will never miss it.
5. Establish an IRA.
If your company doesn’t offer an employer-sponsored retirement plan, look into contributing to an IRA. Many IRAs can be set up online or over the phone in about 15 minutes, which is the same amount of time you might spend standing in line to pick up your morning latte. As of 2012, you can add up to $5,000 annually to an IRA via a recurring automated clearing house (ACH) contribution from a current bank account. Often the investment platform offers a wide range of stocks, bonds, and mutual funds. Like a 401(k) plan, a Roth option is available for an IRA.
6. Take the free money!
How can anyone not be enticed by anything labeled “free”? If your company has a 401(k) match, take full advantage of the free money. The most common matching formula offered by companies in the United States is a 50% match of up to 6% of your contributions. In other words, if you contribute six dollars of every 100 dollars you make, your company will contribute three dollars to your retirement plan.
7. Consider your own risk tolerance and take into account the amount of time you have until retirement.
Everyone has a different comfort level with investments and the stock market. The way your parents or friends invest may not be the right fit for you. Don’t know what kind of investor you are? It’s easy to find an investor profile quiz5 online to help determine what types of investments fit your risk tolerance and time horizon.
8. Know when the money will be yours.
When will you be 100% vested? In other words, how long do you need to stay with the company in order to attain full ownership of the employer contributions? You are always entitled to the contributions you make but most companies follow a vesting schedule for employer contributions. This means that you may be required to work a set number of years to be entitled to the contributions your employer makes on your behalf. Money that you do not “own” according to the vesting schedule will be forfeited back to the employer if you terminate your employment before you have reached full vesting.
9. Don’t treat your 401(k) like a glorified savings account.
In many cases 401(k) plans have restrictions on when you will be allowed to distribute money from the plan without incurring a 10% nondeductible penalty tax. Retirement plans have different rules regarding distributions while still employed or following termination of employment. Before taking money from the plan you will want to review your summary plan description and consult with a tax professional to determine tax implications and your best option.
10. Even if your plan allows them, avoid taking loans against your account.
As tempting as it may be to look at your growing account and want to borrow some fast cash, don’t do it! The money you contributed to the plan was put there for retirement and, unless you’re in dire need, that’s where it should stay. People may argue that loans against your 401(k) contributions are great because you pay the interest back to yourself rather than a faceless institution. However, it’s important to note that you must fund your 401(k) loan payments via payroll deductions. That means that while you are paying the loan back, you’ll have less money available to put into your retirement and you will probably need to reduce your contribution percentage. Even more importantly, if you don’t pay back the loan within the terms the funds distributed to you can be subject to a 10% early withdrawal penalty tax. The moral of the story is that you should exhaust all other options before turning to your 401(k) for a loan.
11. Move your accounts with you.
Remember how great it felt when you consolidated your nine student loans into one payment? You have similar options with retirement accounts as well. Don’t worry if you have had multiple jobs or if you know you don’t plan on staying at your current job for much longer. You can make contributions while employed, and when you move to the next opportunity you may rollover your account to your new employer’s plan or to an IRA. Some plans have restrictions on what can be rolled in so you’ll want to check with your new plan administrator for any restrictions.
12. Most importantly—budget and live within your means.
Between car payments, insurance, rent or mortgage payments, wedding planning, and all the other bills, it’s hard to willingly give up whatever money is left from your paycheck. Most people in their twenties can afford to contribute to a 401(k); it’s just a matter of finding the funding and the will power to do it.
Whether you have a job or are still in the search, there’s planning and action needed now if you hope to have a stable retirement future. So get started.
1 Lee, Jennifer (August 31, 2011). Generation limbo: Waiting it out. The New York Times. Retrieved January 13, 2011, from http://www.nytimes.com/2011/09/01/fashion/recent-college-graduates-wait-for-their-real-careers-to-begin.html?pagewanted=all.
2 Yen, Hope (September 22, 2011). Census: Recession takes big toll on young adults. The Guardian. Retrieved January 13, 2011, from http://www.guardian.co.uk/world/feedarticle/9860674.
3 Henig, Robin Marantz (August 18, 2010). What is it about 20-somethings? The New York Times. Retrieved January 13, 2011, from http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html.
4 AFL-CIO/Working America (2009). Young Workers: A Lost Decade. Retrieved January 13, 2011.
5 GetSmarterAboutMoney.ca. Risk Profile Quiz. Retrieved January 13, 2011, from http://www.getsmarteraboutmoney.ca/tools-and-calculators/quizzes/risk-profile-quiz.htm.