Financial Lesson to my 23 Year Old
As a parent to three daughters, I’ve watched my relationship with them change and evolve as they grow older. For example, when the girls were babies, Jill and I could split parenting duties pretty evenly. Sure, there were nights when they only wanted Jill to put them to bed because she was the current “favorite” parent. But then this changed once they reached toddler and preschool ages and knew that daddy would read three bedtime stories, whereas Jill drew the line at one. It was (and still is) a back and forth with them in many regards.
When Maeve moved into her first apartment, I was tasked with helping lift the heavy stuff and Jill got to consult on the decorating. And Jill got to participate in all of the new home shopping, while I set up Maeve’s internet connection and checked all of the windows and locks.
This isn’t surprising to me, but I do find it reassuring to know that Maeve still looks to me for advice, even as she enters her early twenties and starts her career in nursing. She recently sought me out for advice on saving for retirement. Now that she has a “real’ job, one that offers a company retirement plan, she wanted help deciding if she should be contributing to it. Like most young adults her age, retirement seems so far away. As she adapts to paying all of her own bills (she is officially off my payroll), she wasn’t sure if it made sense to start saving now when she had decades before retirement.
Folks, this was my time to shine. Of course I counseled her to get started now. Saving for retirement in your 20’s, or even your 30’s can be relatively painless as opposed to starting in your 40’s or later. While retirement may seem a long way off, putting a plan in place now is a smart move.
While it may not seem like an important task to do now, I told her that saving for retirement is probably the biggest financial goal of her life and starting earlier gives her a number of significant advantages.
For example, the younger you start, the more aggressive you can be with your investments – which could lead to higher returns. Any market losses are less painful than losses experienced by those saving for retirement in their 50’s or 60’s because you have the benefit of time, which allows you to recover from economic downturns that may impact your retirement savings.
Time itself offers another advantage – the power of compound growth. As you contribute to your retirement plan, the earnings your investments generate grow alongside the market over time. This means that every dollar saved will be worth exponentially more when it comes time for retirement. I told Maeve to treat retirement saving like a marathon, not a sprint. Every little contribution will add up in the long haul to help meet the long-term goal.
Maeve’s employer offers both a traditional and Roth 401k programs with a free company match. In her case, for every 3% of her annual salary that she contributes to the plan, they will match that 3%. Folks, this is free money, and it doesn’t really get any better than free. I explained to her the big difference between her two choices . . . pay the taxes now and never have to pay a tax on that money again or defer them into a tax time-bomb. She saw it and decided on the Roth.
Another benefit of saving sooner means the opportunity to retire sooner. You’ll simply have more funds saved up sooner to make this an option. If you decide to work longer, you are doing this out of choice and not necessity. I told her that there is a big difference between “having” to go to work and “getting” to go to work.
With the future of Social Security uncertain, having a robust savings plan in place can help alleviate the what-ifs. What if benefits are cut drastically by the time you retire? Currently, the Social Security Administration predicts that the Trust fund will be depleted within the next decade, which will result in a 20-25% decline in promised benefits. If you are within a few years of retirement today, this may not be alarming to you. But if, like Maeve, you have thirty or forty years until retirement, the uncertainty around Social Security grows. Without action by Congress, most young workers will need to rely more heavily on personal savings and less on Social Security.
Folks, one of the most common excuses I hear younger people make to justify not saving for retirement is that they are still young. Anyone who is nearing retirement will tell you that the years suddenly go by and building a retirement nest egg is much harder the longer you delay saving. My advice to those early in your career is the same advice I gave to Maeve – you have the gift of time, use it wisely and make it work for you.
And as always - be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.
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