“I’m too young to think about retirement!” may be the response you receive from younger employees, friends, or even your adult children when you ask if they’re contributing to their 401(k) or other retirement investments. While retirement might be the last thing on their minds, the truth is, it’s not too early for them to plan for their post-work lives. In fact, with Social Security shortfalls and decreases in public pensions young people need to invest more in their retirement than their parents or grandparents did.
When you’re trying to convince young people to save for their futures, don’t complicate the issue. Instead, keep it simple, and share the ABC’s of investing in their retirement:
A: Age is on your side.
Reinforce the idea that time is money when it comes to retirement; the person who starts saving in their twenties will have more money than the person who starts saving in their thirties. A longer time to invest also means young people can be more aggressive about their investments (if they wish), and they have more time to endure market fluctuations for greater gains over decades.
Related article: Tax Savings in Your 20s
B: Budgets are your friend.
Some young people are naturals when it comes to managing their money. Maybe their parents were excellent role models, or personal finance is something they enjoy. Other people—both young and old—may not have the first idea of how to create budgets. The important thing to emphasize is thatevery budget needs a line item for retirement savings. Without one, it’s too easy to spend your income on immediate needs or wants, which leaves you without money to invest in your 401(k). When individuals make a commitment to include retirement savings in a monthly budget, it becomes a consistent habit that (literally) pays off.
C: Compound interest pays off.
Some young people may feel that it’s not worth it to start investing now because they can only contribute a small amount to their 401(k). Thanks to compound interest, the opposite is true. When you make a deposit that earns interest, and reinvest that money (rather than paying it out), you earn interest not only on the original investment but also on any accumulated interest. The sooner young people start investing, the sooner they can take advantage of compound interest and the easier it will be to achieve their financial goals.
D: Don’t leave money on the table.
Many employees don’t realize the importance of making the most of an employer’s 401(k) match. The easiest way to explain this benefit is to illustrate the difference it makes when an employee doesn’t contribute enough to maximize an employer match. Let’s use the example of an employer that matches up to 3% of the employee’s salary.
When the employee maximizes the match:
- She contributes $1,500 to her 401(k) each year (3% of her $50,000 annual salary)
- Her company contributes $1,500 (3% match)
- Total annual contribution is $3,000 to the employee’s 401(k)
When employee does not maximize the match:
- She contributes $500 to her 401(k) each year (1% of her $50,000 annual salary)
- Her company contributes $500 (1% match)
- Total annual contribution is $1,000 to the employees 401(k)
In short, the employee left an extra $1,000 of free money from her companyon the table by not making the maximum contribution to her 401(k). There are also plenty of immediate and long-term tax advantages when it comes to 401(k)s. Combined with the very simple example above, it’s hard for young people to ignore the value of maximizing their contribution to receive the full employer match.
E: Envision your life in retirement.
Many people who retire today are experiencing substantial drops in their standards of living because they don’t have enough money saved. Even if young people say they’re too young to think about retirement, they’ve probably spent some time imagining their retirement lives.
Chances are those dreams don’t involve lower standards of living. Maybe they want to travel, or buy a vacation home, or donate time and money to charitable causes. The truth is, without saving for their retirements now, young people won’t be able to make those things happen in the future. But with an investment strategy in place, they’re more likely to make their retirement dreams become a reality.
For young people who are just beginning their careers, retiring 50 years from now is practically impossible to imagine. Whether you’re a benefits administrator, parent, or friend, it might be difficult to persuade them to start saving for retirement today. But you can provide them with the facts. Illustrate how age is in their favor, how budgets build healthy money habits, and how compound interest will make their money add up. Show them the power of financial planning and you might just convince them to start saving now.
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