Young professionals have a lot on their minds these days. Perhaps furthest from it is a retirement saving and investment plan.
But as a financial advisor, you must impress upon them that the earlier they start saving and investing, the better.
First, however, advisors must meet young professionals where they are. Advisors should be aware that, for young professionals, putting money aside for the future can be easier said than done. After all, high rent, student-loan payments and modest junior-level salaries make saving a challenge.
On top of those factors, COVID-19 and the associated global recession have added much economic uncertainty.
How do you as an advisor speak to them — the new savers, the reluctant ones and the worried ones — to educate them and show them a path toward a secure future? It comes down to selling them on some proven principles of retirement saving and investing and showing them why it’s worth it to get started sooner rather than later.
Here are some key points advisors should make to young professionals when guiding them on a financial plan for retirement.
Become A Disciplined Saver
The optimal savings rate toward retirement is at least 20% of gross income. That may be too high for young savers, given their other financial obligations, but the important point is getting them to make savings a priority as soon as possible.
Show them models of how much they’ll need in retirement and how compound interest works. That approach will create an incentive for them to get started. The key is to get them saving at a consistent rate within their budget and increasing that saving rate when they can.
Explain to them that the best way to stick with their savings plan is to develop automated savings strategies, such as to have contributions made directly to a 401(k). Another option that’s popular is splitting up direct deposits, with one going into a dedicated savings account.
Contribute To Their 401(k) — Even Without Employer Matching
Due to the pandemic, many companies suspended or reduced their 401(k) matching contributions to save cash and avoid layoffs. Although such a move slows one’s accumulation of retirement funds, the bigger long-term damage is done when an employee stops contributing to the 401(k) at the same time that the employer stops matching.
Advisors should explain to young clients how contributions to a 401(k) accumulate on a tax-deferred basis and why it’s important for them to, at a minimum, maintain their current retirement contributions. Or if they can afford it, advise them to increase their contributions to compensate for the temporary loss of their employer’s 401(k) match.
Another alternative is redirecting a portion of their retirement contributions to a Roth individual retirement account. This is an option some young savers don’t know enough about. Educate them, explaining how contributions to a Roth IRA are made with funds on which they’ve already paid income tax, and in many cases, Roth IRAs offer more flexibility when it comes to investment choices.
But whatever they do, impress on them that they need to keep contributing. The takeaway for them is this: By staying the course, either in their 401(k) or Roth IRA, they can continue to grow their nest egg and take advantage of a market recovery when it arrives. And if they can afford to increase their contributions, it will keep their retirement plan on track.
Diversify Savings And Investment Vehicles
Again, a simple explanation is in order for young savers to have a clear grasp of their options.
Diversity in their plan is especially important given market volatility. They need to be reminded that qualified retirement funds are functionally locked away until they reach age 59½, so that money isn’t available in the event that a cash need arises.
Advisors can have young investors consider balancing traditional 401(k)s with a Roth IRA — or a Roth 401(k) if it’s offered — or a normal brokerage account.
Again, explain that Roth contributions are made after tax, but they allow tax-free growth and withdrawals in retirement and that they also typically allow penalty-free withdrawals up to the amount contributed. This provides some liquidity as well as an excellent tax benefit for accounts that appreciate substantially.
Having a growth mindset is central to building a good retirement plan while young. With many years until retirement, a young investor’s accounts should be weighted toward stocks, with enough diversification to protect against poor-performing stocks or industries.
Young professionals can get impatient; remind them that success in the stock market comes over the long haul and that they have time to ride out cycles and downturns.
With a long time horizon and relatively low income relative to their later career earnings, young investors are in a unique position to realize the benefits of these vehicles.
Despite the topsy-turvy financial year we’ve been through due to the pandemic, advisors can be a steadying influence helping young investors plan wisely for their future. Educating them on the benefits of consistent saving and investing, being growth-minded, and diversifying will pay off for them many years from now.