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Why Young People Should Start A Retirement Plan Savings Habit Now

by Brett Keener
When you’re young and just starting to make money, the last thing you may want to think about is retirement. But in reality, there is no better time than a first job to start setting money aside systematically in a retirement plan.

It’s not critically important how much money you save in an IRA, 401(k) or other type of plan. What really matters is that you start a retirement plan savings habit as soon as possible and keep investing in it persistently. In this article, we’ll suggest six reasons why this is one of the smartest financial decisions a young person can make.

Reason #1- The Power of Tax-Deferred Compounding

If you are 25 years old, you might not think it matters much whether you start saving now or next year. But by the time you reach retirement age, the cost of procrastination can be huge. For example, a 25-year-old person who sets aside $2,000 per year in an IRA and earns a 7% return will hypothetically build a nest egg of $427,219 by age 65. But if this person delays starting the program by just one year, it will be worth about $30,000 less.

According to the Bureau of Statistics, today’s average person who reaches retirement age can expect to live to age 86, and life expectancies keep increasing for each generation. So, by procrastinating now, you possibly risk reducing your standard of living for the last 25-30 years of your life. In a retirement plan, money can compound on a tax-deferred basis without any current income tax consequences. That’s an attractive tax situation for socking money away long-term.

Reason #2- It Doesn’t Cost a Dollar to Save a Dollar

Do you worry that you can’t afford to save $100 per month in a retirement plan, because you need to spend the money on something else? The truth is - it won’t cost you as much out-of-pocket as you save, because you may qualify to receive a current tax break for money contributed to a traditional IRA or 401(k). For example, suppose you pay federal and state income tax at a combined rate of 30%. If you put $1,000 into a Traditional IRA and qualify for a tax adjustment, you will be allowed to reduce your taxable income by the same amount, resulting in $300 less tax paid.

Reason #3- Matching Is Powerful

Some employers will match a portion of the money their workers defer into their own plans. For example, suppose that your company will match some of the money you defer into your 401(k) on a 50% basis. If you put in $100, your employer matches with another $50. Although it may take several years for employer matching money to “vest” so that it becomes yours, this is like getting a quick 50% return on your savings. Also, you begin to build compound earnings on the whole amount - your $100 plus your employer’s $50, and when you vest, you vest in those earnings too. If your company offers matching, this is a powerful reason to start saving now.

Reason #4- “Government Matching”

It’s not just your employer that may match your own plan money. Through 2006, the federal government may “match” a portion of your plan contributions with a tax credit. Depending on your income, the credit can be as high as 50% of the first $2,000 you put into a Traditional or Roth IRA, 401(k), 403(b), SIMPLE or other type of plan. The largest credit (50%) is available to single filers up to $15,000 of Adjusted Gross Income and joint filers up to $30,000. Lesser credits are available to single filers up to $25,000 and joint filers to $50,000.

Suppose that you participate in a plan where your contributions are matched 50% by your employer, and you also qualify for a 20% “government matching” credit through 2006. That means - every dollar of your own money that goes into the plan is matched by an immediate return of 70 cents: 50 cents in the plan, and 20 cents in your pocket. Where else can your money work that hard?

Reason #5- Social Security Is Iffy

For any person in the U.S. who is age 40 or less, the outlook for Social Security retirement benefits is not rosy. For starters, you won’t reach Normal Retirement Age and qualify for full benefits until age 67 under current law, and that could go higher. Then, consider the burden millions of aging Baby Boomers will place on the system as they start to retire. According to the Social Security Administration, today there are about 3.4 active workers for every retired Social Security beneficiary. By the middle of this century, Social Security estimates that ratio will drop to about 2 workers per beneficiary. Recently, the Social Security Trustees reported that the outgo for Social Security retirement benefits will start to exceed income in 2017 and the trust fund will be exhausted by 2041 unless major changes are made. If you don’t start planning for your own retirement now, you may be left out in the cold later.

Reason #6- Habits Are Hard to Break

At first, it can be tough to live on less current income every month, because you are taking care of your retirement plan first. But after a few months, you won’t even miss the money. Putting money into your retirement plan steadily regularly is one of the best financial habits any person can start at a young age.

Don’t be afraid to talk to a financial professional about the best way to set up your retirement plan savings program and its investment strategy. You can start your savings habit without having to make the investment decisions alone.

Note: Figures quoted are for illustrative purposes only and are not indicative of a specific result that may be obtained on any particular investment. They do not include consideration of the time value of money, inflation, and fluctuation in principal or in many instances, taxes.

Registered Representative of Park Avenue Securities LLC (PAS). Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Certified Financial Services, LLC is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member NASD, SIPC.
Brett Keener is a financial representative at Certified Financial Services, LLC in Paramus, NJ. Mr. Keener helps clients in their personal, estate, and business planning. He is a graduate of the College of William and Mary.