Why Millennials Need to Start Saving for
Retirement Now!
By STACY FRANCIS
As a professional 20-something, everyone wants a piece of
your paycheck, but are you potentially missing out on a big opportunity?
It may be difficult for 20-something professionals to contemplate
saving for retirement while they’re just embarking on their careers. However,
there are numerous reasons why contributing to your employer’s retirement plan
is a fantastic place to start. First, many employers offer matching 401(k)
contributions in the 3% to 5% range. At many large companies, this is the
equivalent of an annual salary increase, and yet a vast majority of
20-something professionals fail to take advantage of this money by not
contributing.
While the free money is nice, there may be an even better reason
to start contributing to your employer retirement plan right away. When you
re-route a certain amount of your paycheck each month, it feels like you never
had it in the first place. This effectively forces you to live below your means
in a relatively pain-free way, a powerful habit that will get you started off
on the right financial foot.
As Richard Thaler and Cass Sunstein wrote in the book “Nudge,” the feeling of losing something (like seeing a reduction in your paycheck) makes us twice as miserable as gaining the same thing makes us happy. In other words, starting now to save for retirement via your employer-sponsored plan is a lot easier, psychologically speaking, than trying to start later on, after you’ve become accustomed to your full paycheck. Some employer retirement plans even have a feature that will annually adjust your contribution level. Setting the date of your contribution increase for around the same time of year that you receive your annual salary adjustment will automatically increase your contribution amount each year, without ever impacting your paycheck.
Perhaps the best argument for participating in your employer retirement plan, however, is something that the Millennial generation has become known for: job hopping.
It’s no secret that Millennials chase after their dreams when it
comes to employment. This includes potentially making one or several dramatic
career changes over the course of their employed life. Contributing to a
retirement plan in your 20s gives you substantially more freedom to pursue
other opportunities down the line. The money you put into your retirement plan
in your 20s will continue to grow exponentially year after year, regardless of
whether you continue to contribute to it.
For example, let’s say you invest $5,000 annually in your
employer-sponsored retirement plan starting at the age 22 (the age at which
many college graduates enter the workforce) until you turn 30. Assuming 7%
growth compounded annually, you’d have approximately $55,000 by the time you
reach 30. Even If you were to stop contributing, your money will have grown to
over $108,000 by the time you turn 40.
Bottom
line: If you’ve built up a sizable savings in your 20s, you’ll have
more freedom to take financial risks in your 30s–like taking a substantial drop
in salary to pursue your dream job.
Many factors contribute to a solid financial future, and there’s
no denying that 20-something professionals have a lot of responsibilities
competing for their limited financial resources. However, contributing to an
employer retirement plan is an important piece of the puzzle and those who get
this piece right will find that they have increased flexibility, options and
freedom in the future.
Stacy Francis is president and CEO of Francis Financial, a
fee-only boutique wealth management and financial planning firm.
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