New graduates face fierce financial headwinds of soaring rent, ballooning student debt and inflation. The oft-repeated message to the young to “save early and often” may feel near-impossible. Still, it's worth highlighting the benefit of doing so for those who can somehow squirrel some money away.
One of the most compelling reasons is regret. By others, that is. Almost 70% of Gen Zers and 77% of millennials say they wish they had invested earlier, according to a survey by Magnify Money.
The median retirement account balance for all earners is about $15,000. Since 90% of earners of all ages are not on track to retire comfortably, the tidal wave of national regret is no surprise. One appreciates too late that the most powerful law in the economic universe is the power of compound interest.
Consider this: At age 35, you should have twice whatever your annual salary is tucked away in retirement savings, four times at age 45, seven times at age 55 and 11 times at age 67, according to consulting group Aon. That means a 45-year-old earning $100,000 a year should have $400,000, while a 67-year-old at the same income needs $1.1 million of retirement savings to use in conjunction with Social Security to maintain the same standard of living until death.
Simple math tells us starting to save at an early age requires the least sacrifice. Starting early means two-thirds of that $1.1 million comes from investment earnings, not your own hide. The sooner you save the the more the financial markets do the heavy lifting.
To accumulate the necessary retirement account balance at age 67, an average-earning 25-year-old needs to save 16% of her pay every year. At age 35, she'll have to save 25%; start at 50 and she'll need to save half of her take-home pay.
The starting salary of a new graduate is about $55,000, which means after adjustments for Social Security, taxes and health care, take-home pay is closer to $40,000, or $3,300 a month. It’s nearly impossible to save $800 for retirement (about 16% of the monthly pay of someone earning over $55,000) and $250 for a condo (if you're trying to scrape together a down payment of about $40,000 in 10 years) on top of that.
But if the new graduate has an employer who contributes $400 of the target $800 to a 401(k)-type plan and the worker’s $400 contribution comes before tax, net take-home pay would be $300 less while she's still saving $800 a month for retirement.
The sad reality though is that most workers under 40 are not in a retirement plan. We clearly need a national retirement system and a solution to runaway college costs.
In the meantime, there are a few things a young graduate can do to help prepare for retirement, even if it seems so very far away. First, if you're the parent, relative or friend of a new graduate, remember that a cash gift is always appreciated, but a better gift may be a session with a trusted financial adviser. Here's how to find an adviser you can trust. Key lifetime moments - graduations, weddings, the birth of a baby - are all catalyzing times to imagine your future. If the planning works, it's a lot cheaper than dealing with regret at age 50 and near-poverty at 67.
For the graduate, try to avoid regret right now by tracking expenses that bought short-lived pleasures. Instead, try the slow-building pleasure of saving $100 a month in an emergency fund. Pass the requirements for the Boy Scout personal financial merit badge by following expenses for three months and establishing short- medium- and longer-term goals.
Regret usually comes from the advertisers’ bread and butter, your impulses. I do not blame the human need to compete for social standing and comfort with cars, clothes and housing even if it often overwhelms the other human need to avoid regret late in life. But understand consumer impulses and how they rarely produce contentment. Until we get a better retirement system, use self-psychology to save as much as you can as early as you can.
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Read more articles by Teresa Ghilarducci
