Contributing Author: Dianne Schechter
Launching into adulthood is never an easy task, but today's young people do have it pretty rough -- at least compared with recent generations. Fallout from the Great Recession has delayed the start of full-fledged careers for many in the millennial generation -- those who range in age from 18 to 34.
Unsurprisingly, that late start in the working world may impede their ability to begin planning for the end of those careers. After all, many young people are still struggling to find meaningful employment to cover current expenses and are burdened by crushing student loan payments. Saving for retirement is a luxury that many in the millennial generation, also called Gen Y, can't yet afford.
You have probably heard it yourself: the impression that millennials are financial freewheelers. The theory goes that today's 20- or 30-somethings-year-olds spend with little regard for savings, and even less regard for retiring.
Retirement planning experts say that this assumption isn't entirely accurate — though it is perennially true that most young adults don't make retirement savings a financial priority. But, as the experts point out, millennials are in an ideal position to get started, because whatever they set aside will grow and accrue interest greatly over time. The reason is a magical little thing called compounding. It's what happens when your interest keeps earning interest, year after year.
The value of compounding means you'll have to contribute less later. Millennials should open retirement accounts as early as they can — that way, the savings have more time to build and be reinvested. Eventually, the interest an account accrues will begin to earn interest of its own. If you start early, the effects of compounding can be huge.
For example, suppose you start setting aside $1,000 a year (about $19 a week) when you're 25. You put it in a retirement account earning 7% a year. Even if you stop investing completely when you turn 35 - that is, you've invested for only 10 years - your total investment will have grown to nearly $113,000 by the time you turn 65 and are ready to retire. That's right: A $10,000 investment turns into $113,000.
The earlier you start investing, the more you can benefit from compounding. That's why you need to get going as soon as possible.
Here are a few ideas to help you begin your early retirement:
- Start saving as early as possible – and as much as possible. Save consistently over time. Avoid taking loans and early withdrawals from retirement accounts as they can severely inhibit the growth of long-term retirement savings.
- Participate in employer-sponsored retirement plans, if available. Many employers also contribute to the company-sponsored retirement plan by matching employees' contributions. Take full advantage of matching employer contributions, and defer as much as possible.
- Get educated about retirement investing. Whether relying on the expertise of professional advisors or taking a more do-it-yourself approach, gain the knowledge to ask questions and make informed decisions. Learn about Social Security and government benefits, keeping in mind that benefits may change over time.
- Seek assistance from a professional financial advisor, if needed. Ask your employer whether professional advisor services are available through its company-sponsored retirement benefits. If not, check with family and friends for referrals.
Consider retirement benefits as part of total compensation. Retirement plans, like other employer-provided benefits, are an important part of one's overall compensation, yet can be overlooked when searching for a job. Ensure that you know about all benefits offered by a prospective employer when comparing job offers. If you currently work for an employer that doesn't offer a retirement plan, ask your employer to consider setting up a plan. We can help! Butterfield Schechter LLP is San Diego's largest law firm focusing its practice on employee benefits.