Preparing early: Why you should begin your retirement planning in your 20s or 30s
The merits of saving for retirement were instilled early in
Yet, several years ago, Joshi (who, ironically, works in financial management) said he had a "real gut check" when he realized his 401(k) plan hadn't grown in five or six years. "It had just kind of plateaued," said the 34-year-old.
Compounding matters, friends in other industries were averaging yearly returns of 5 percent to 8 percent, which, compared to the performance of his own portfolio, was alarming. "My 401(k) wasn't performing at the same rate as friends of mine who had no financial background at all," said Joshi, who was 30 at the time and felt he wasn't fulfilling the expectations of his parents or, more importantly, his own long-term objectives.
Joshi is representative of an emerging trend - young workers preparing early for retirement. In fact,
This rise is likely due to the spike in the use of automatic enrollment into 401(k) plans in recent years, but it's not all good news.
The average deferral rate stayed relatively flat over three years, according to the
But
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Saving early and wisely
"I didn't study finance and didn't know much about money, accounting, financing or the stock market," said Torrance, who lives in Buffalo and works as an operations manager for a utility company. "Guys 50 or maybe older from work said if they could go back, they would have started saving money right out of school, in their mid- 20s. ... It really hits home when you're coming into the workforce and start hearing it from other guys, outside your family."
It's not that Torrance, 28, wasn't occasionally tempted to dip into his pocket. "I can't begin to tell you the temptations. I was single for about four years, so you date, you go out more to parties, take vacations, but I never touched my contribution." Instead, he recognized the long-term benefit of making do with what he had. "At the time, it was more of a mental game; you have to fight it through your 20s. I'm going on 30 in about a year, and I'm seeing my balance start to steadily grow. I still find ways to have a nice time, but looking back, I think I made the right decision to not touch it," said Torrance.
"They've heard their parents talk about retirement with little or no pensions, so the responsibility falls on the individual's shoulders. I hear 30-year-olds say all the time that they don't think they'll get any
The key isn't to resist temptation but to moderate it, said Ewell. "It's inevitable you'll splurge on something that doesn't make financial sense. I never encourage a young person to totally starve themselves from the things they want but don't necessarily need. As long as you've put your savings on autopilot and you're building your financial future, you should be allowed to reward yourself. That can be an incredibly powerful incentive."
She began socking money into a stock account when she entered college, and while she splurged here and there on items such as an iPad, she never "drained the bank." Her savings have almost doubled in the last year.
When she turned 21, she began working with a financial adviser, who asked her what level of risk she was willing to assume. "I'm very cautious, so we wanted to stay away from really high-risk situations." With Musgrove starting her first job, her adviser also helped her understand how to best use her 401(k).
Best ways to save
It's important to save all a person can in tax-deferred accounts such as a 401(k) or tax-exempt accounts such as a Roth 401(k), said
A typical person in his or her 20s or 30s should have a stock- heavy portfolio, Reichenstein said. Target retirement date funds at Vanguard, Fidelity and
Joshi, who also considers himself conservative, said he avoids "lavish" purchases such as buying a home. Part of that's simply a matter of mobility because he's moved around considerably for work.
"The other part is I want to make sure I don't overstretch it, especially with the markets going up and down over the last 10 years," he said. "The notion of this generation is that we might not be as invested in the stock market as we should because we're afraid of what happened to our parents."
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