Start saving early; avoid your parents problems
By John Pelletier
Last Update: 12:01 AM ET Apr 16, 2012
STOWE, Vt. (MarketWatch) The majority of this springs college graduates are not ready to take on the world financially. On average, two-thirds of students will graduate with student loans of $25,250 and more than $4,000 in credit card debt.
With a job or not, all these young people will strike out on their own, and my question is how many will have the personal finance savvy to avoid the same mistakes their parents made?
April is personal finance month, so allow me to rant now so as not to spoil the commencement celebrations come May.
Graduates, your parents did not save and their retirement nest is filled with cracked eggs. Surveys show that:
- Just one in 10 are confident they can retire comfortably
- More than half expect to delay their retirement as a result of the Great Recession
- Slightly more than one-quarter dont think theyll ever retire
- Nearly half believe that Social Security payments will be very important to them in retirement which currently average only $14,000 a year
- Four out of 10 expect to scale back their lifestyles in retirement
- Nearly one-third feel they will struggle to make ends meet when they retire
If you can rid yourself of the notion that its way too early to think about retirement, you can avoid the financial headaches Mom and Dad are dealing with.
Here are some things you should do as soon as you start working in your first job, even before you think about that car or condo:
- Your youth is a giant investing advantage that your parents no longer have dont waste it. Start saving for retirement. Now. Heres how interest compounds over time: If you save $10 a day at age 25, youll have more than $1 million by age 65, assuming an 8% rate of return. If you procrastinate and start at age 35, youll have $445,000; and at age 45, youll only have $180,000.You can double you money each decade with a 7% return, so a $10,000 investment at age 22 becomes a $320,000 investment at age 72.
- If your company matches your savings in a retirement account, contribute at least enough into the plan to get the full employer match. For example, a $1 for $1 match is a 100% percent return on your investment better than anything on Wall Street.
- Consider putting your money into mutual fund products that will automatically give you investment diversification, such as balanced, target-date maturity and global asset allocation mutual funds. These products are simple solutions for those who dont want to spend time managing their investments.
- When you get a raise, put half of it into your retirement fund, and youll never miss it.
- When you switch jobs, roll your retirement fund into a new one; dont ever take a check (remember the compounding interest). Cashing out your retirement fund when you switch jobs is a terrible mistake.
There is certainly more to being financially literate than setting up a solid retirement plan.
The chances are good that you didnt have a personal finance course in college or before, so look around your community for one to enroll in. Your company might offer one, or your local community college. Such courses teach you a lot, from setting up a monthly budget, to investing wisely, to buying a house or a car and more. If no courses are available then get a personal finance book from your library.
Once you have your retirement plan set up, you can forget about it. If things go well, you might even be able to afford to retire early. But if you wait too long, you may never be able to retire, which, sadly, is the fate some of your parents face.
John Pelletier is Director of the Center for Financial Literacy at Champlain College and formerly Chief Operating Officer of Natixis Global Associates and Chief Legal Officer of Eaton Vance Corp.