Helping Our “Young Adult” Children Focus on the Future
If you are like most parents, you want your children to complete college, get a job and be successful. In fact, you’ve guided them all their life so they could one day become independent and financially stable. As they close the college books and begin down their career path, there is one more lesson you can impact – and that is the value of investing for a secure financial future early. Yes, you can help them develop good saving habits. To quote Aristotle, “We are what we repeatedly do. Excellence, then, is not an act but a habit.”
This may seem like a no brainer, yet young adults do not live their life thinking about the distant future. They are more focused on finally getting a job, living on their own, and frankly – having fun. How can you help? By sharing with them some of the basics they should know about savings and investments.
The Cost of Waiting
Financial publications often focus on where to invest but seldom on the need to save. You’ve seen the covers:
“Best 10 stocks for 2017!”
“Where to Invest Your Money NOW!”
“Which Industries Will Benefit Under the New Administration?!”
I understand the benefit of selecting an appropriate investment. But it’s not the biggest dilemma facing most Americans. What is? Not saving enough. It’s a habit that needs to be addressed at an early age. The sooner the better. Consider this example of two savers:
Starts contributing $30 per week at age 21
Stops contributing 14 years later at age 35
Total contribution – $21,840
Starts contributing $30 per week at age 35
Stops contributing 30 years later at age 60
Total contribution – $46,800
At first glance it appears that Tracy is in a better position. However, assuming a 6.3 % annualized rate of return, who do you think will have more money at age 65?
Anne: $209,319 versus Tracy: $130,042
Tracy contributed more than Anne, but delaying her start date by 14 years she significantly hurt her accumulated balance at retirement.
Obviously, the more they contribute and the longer they contribute the impact is even greater. Clearly there is a cost of waiting.
Millennials Get It!
There is good news. According to a study conducted in 2016 by Bankrate.com, millennials have increased their savings rates in recent years. Millennials, defined in the study as those between the ages of 18 and 29, are saving at these levels:
- 14% are saving more than 15%
- 15% are saving between 11% and 15%
- 33% are saving between 6% and 10%
- 19% are saving 5% or less
- 14% are saving nothing
This is impressive, but we can help our children do better. When they land that first job, you can ask them two easy questions:
- Does your company offer a 401k plan?
- When are you eligible to participate?
They may or may not know the answers to these questions; if they don’t, they should. Let them know the importance of taking ownership of their financial future. Here are some suggestions you can make that will help them realize the impact of their decisions today on their tomorrows. Suggest:
- If they have a 401k, they should enter the plan as soon as they are eligible. Some plans impose a one year wait, but many plans today allow employees to enter sooner (i.e., immediately, 3 months).
- Starting contribution rate of 10%. For those companies that provide a match, many advisors will suggest starting with an employee contribution % needed to maximize the match (i.e., if an employer matches 50% of an employee’s contribution to a maximum of 6%, a participant should consider contributing no less than 6%). Whether a company offers a match or not, however, I still recommend a young worker contribute a minimum 10%. This may sound high, but if paying down student debt is not an issue, many twenty-somethings generally have few commitments and/or liabilities and can probably afford this contribution level. If they are responsible for paying down student loans, though, perhaps a starting contribution level of 5% is more appropriate. And consider this. If this is a first job, they are starting from scratch. One week earlier, there were no paychecks and no deposits into their account. It’s better that they become comfortable with a lower net deposit from the start.
- Selecting a target date investment option. You’ll recognize these investment options. They all include the year that corresponds to their approximate retirement date, in five year increments (i.e., investment fund 2045, 2050, 2055, etc.). Today, most plans include these options. Unless your college grad wants to pick from among the other options in the plan and monitor their choices from year-to-year, the target date models are a smart choice. They will automatically diversify their contributions and, equally important, re-balance the account more conservatively as they approach retirement.
- Contributing to a Roth 401k. If their plan allows for Roth 401k contributions, it can make sense if you believe their tax bracket will be the same or higher in retirement. This may be difficult to project, but there is a high likelihood of this for young workers currently in the 15% tax bracket (which is the case for single taxpayers whose annual income is below $37,950 in 2017). What is a Roth 401k contribution? Unlike a traditional 401k, which allow for pre-tax contributions, deferrals to a Roth 401k are made with after-tax contributions. The good news, however, is that distributions in retirement are made tax free. Ask your CPA whether the Roth 401k is right for your college grad. If it does make sense, but they are still conflicted, consider suggesting they contribute half to the Roth 401k and the other half to the Traditional 401k.
- If the plan permits, select an annual “auto-increase” on contributions. This feature allows participants to automatically increase their contribution % each year by a pre-determined amount on a pre-determined date. For example, if they decide they want to automatically increase their contribution each year by 1%, on their birthdate, an initial 10% deferral level will increase to 15% in only 5 years. This is significant and the benefit should not be underestimated. They should avoid any temptation to adjust their contribution level manually from year to year. It will never happen.
If you want your college graduate to get a good start you can help them make thoughtful decisions. As Henry H. Buckley once said, “Save a part of your income and begin now, for the man with a surplus controls circumstances and the man without a surplus is controlled by circumstances.”
Alan J. Fishman, CLU, CFP ®
Yorktown Financial Group, Inc.
Alan J. Fishman, CLU, CFP ® is a Registered Representative and Investment Advisor Representative of Equity Services, Inc. Securities and investment advisory services are offered solely by Equity Services, Inc. Member FINRA/SIPC, Rose Tree Corporate Center I, 1400 North Providence Road, Suite 117, Media PA 19063 610-891-9700. Yorktown Financial Group, Inc. is independent of Equity Services, Inc. This information is not intended as tax or legal advice. For advice concerning their own situation, customers should consult with their appropriate professional advisor. TC94233(0317)1