The merits of saving for retirement were instilled in Neeraj Joshi by his parents early.
Yet, several years ago, Joshi (who ironically works in financial management) said he had a "real gut check" when he realized his 401(k) plan hadn't grown in five or six years. "It had just kind of plateaued," said the 34-year-old.
Compounding matters, friends in other industries were averaging yearly returns of five to eight percent which, compared to the performance of his own portfolio, was alarming. "My 401(k) wasn't performing at the same rate as friends of mine who had no financial background at all," said Joshi, who was 30 at the time and felt he wasn't fulfilling the expectations of his parents nor, most importantly, his own long term objectives.
So Joshi turned to a financial advisor and began taking investment classes. The initiative paid off: he's averaging a 12 percent annual return on his portfolio.
Joshi is representative of an emerging trendyoung workers preparing early for retirement. In fact, Wells Fargo Institutional Retirement and Trust, which regularly analyzes behavioral trends among 401(k) participants, has seen an uptick in workers ages 18 to 39 participating in employer sponsored programsfrom 43.9 percent three years ago to 50.4 percent today.
This rise is likely due to the spike in the use of automatic enrollment into 401(k) plans in recent years, but it's not all good news.
The average deferral rate stayed relatively flat over three years, according to the Wells Fargo report: 5.1 percent of salary today compared to 5.2 percent three years ago, perhaps stemming from the fact that many employers automatically enroll their employees at a relatively low deferral rate, such as three percent.
But Bank of America Merrill Lynch said savings trends during the first half of 2014 were encouraging among employees of all age groups. The number of first time contributors overall increased by 37 percent, and among those in the Millennial generation, the number jumped to 55 percent. Millennials make up 20 percent more of the total contributor population than they did at the midpoint of 2013.
Financial advisor Garrett Prom said he's seen "a mixed bag" among 20 and 30 year olds planning for retirement. "One client called me before she even graduated from college and said she'd like to sit down with me and start planning for retirement. There are young folks out there today that recognize that retirement's important and that it behooves them to start thinking about it immediately," said Prom, founder of Prominent Financial Planning.
Saving early and wisely
Josh Torrance started planning for retirement when he was 21 and became eligible for his employer's 401(k) through his first real job out of college.
"I didn't study finance and didn't know much about money, accounting, financing or the stock market," said Torrance, who lives in Buffalo and works as an operations manager for a utility company. "Guys 50 or maybe older from work said if they could go back, they would have started saving money right out of school, in their mid 20s...It really hits home when you're coming into the workforce and start hearing it from other guys, outside your family."
It's not that Torrance, 28, wasn't occasionally tempted to dip into his pocket. "I can't begin to tell you the temptations. I was single for about four years, so you date, you go out more to parties, take vacations, but I never touched my contribution." Instead, he recognized the long term benefit of making do with what he had. "At the time, it was more of a mental game; you have to fight it through your 20s. I'm going on 30 in about a year, and I'm seeing my balance start to steadily grow. I still find ways to have a nice time, but looking back, I think I made the right decision to not touch it," said Torrance.
Steven Ewell, vice president of Schroeder, Braxton & Vogt Financial Advisors, believes more 20 and 30 year olds are thinking about planning for retirement. "Theyve heard their parents talk about retirement with little or no pensions, so the responsibility falls on the individual's shoulders. I hear 30 year olds say all the time that they dont think they'll get any Social Security benefits, even though they've been paying in for years." Combined, he said, all of this fosters a bigger focus on planning early.
The key isnt to resist temptation, but to moderate it, said Ewell. "Its inevitable you'll splurge on something that doesnt make financial sense. I never encourage a young person to totally starve themselves from the things they want but dont necessarily need. As long as youve put your savings on autopilot and youre building your financial future, you should be allowed to reward yourself. That can be an incredibly powerful incentive."
Rachel Musgrove, 22, a civil engineer who lives in Houston, always has had plenty of self incentive. "When I was babysitting in high school, or when my parents gave me an allowance, I stuck it right into a bank account. My parents definitely encouraged me to do it and taught me how," she said. She began socking money into a stock account when she entered college, and while she splurged here and there on items such as an iPad she never "drained the bank." Her savings have almost doubled in the last year.
When she turned 21 she began working with a financial advisor, who asked her what level of risk she was willing to assume. "I'm very cautious, so we wanted to stay away from really high risk situations." With Musgrove starting her first job, her advisor also helped her understand how to best use her 401(k).
Best ways to save
It's important to save all a person can in tax-deferred accounts such as a 401(k) or tax-exempt account such as a Roth 401(k), said Bill Reichenstein at Baylor University's Hankamer School of Business. These saving vehicles have strong tax advantages compared to saving in a taxable account or non-qualified annuity, he added.
A typical person in their 20s and 30s should have a stock heavy portfolio, Reichenstein said. Target retirement date funds at Vanguard, Fidelity and T. Rowe Price the three largest players in this market each recommends about a 90 percent stock exposure with 30 percent of the stock portfolio invested in foreign stocks.
Joshi, who also considers himself conservative, said he avoids "lavish" purchases such as buying a home. Part of that's simply a matter of mobility because he's moved around considerably for work.
"The other part is I want to make sure I don't overstretch it, especially with the markets going up and down over the last 10 years," he said. "The notion of this generation is that we might not be as invested in the stock market as we should because we're afraid of what happened to our parents."
Yet, several years ago, Joshi (who ironically works in financial management) said he had a "real gut check" when he realized his 401(k) plan hadn't grown in five or six years. "It had just kind of plateaued," said the 34-year-old.
Compounding matters, friends in other industries were averaging yearly returns of five to eight percent which, compared to the performance of his own portfolio, was alarming. "My 401(k) wasn't performing at the same rate as friends of mine who had no financial background at all," said Joshi, who was 30 at the time and felt he wasn't fulfilling the expectations of his parents nor, most importantly, his own long term objectives.
So Joshi turned to a financial advisor and began taking investment classes. The initiative paid off: he's averaging a 12 percent annual return on his portfolio.
Joshi is representative of an emerging trendyoung workers preparing early for retirement. In fact, Wells Fargo Institutional Retirement and Trust, which regularly analyzes behavioral trends among 401(k) participants, has seen an uptick in workers ages 18 to 39 participating in employer sponsored programsfrom 43.9 percent three years ago to 50.4 percent today.
This rise is likely due to the spike in the use of automatic enrollment into 401(k) plans in recent years, but it's not all good news.
The average deferral rate stayed relatively flat over three years, according to the Wells Fargo report: 5.1 percent of salary today compared to 5.2 percent three years ago, perhaps stemming from the fact that many employers automatically enroll their employees at a relatively low deferral rate, such as three percent.
But Bank of America Merrill Lynch said savings trends during the first half of 2014 were encouraging among employees of all age groups. The number of first time contributors overall increased by 37 percent, and among those in the Millennial generation, the number jumped to 55 percent. Millennials make up 20 percent more of the total contributor population than they did at the midpoint of 2013.
Financial advisor Garrett Prom said he's seen "a mixed bag" among 20 and 30 year olds planning for retirement. "One client called me before she even graduated from college and said she'd like to sit down with me and start planning for retirement. There are young folks out there today that recognize that retirement's important and that it behooves them to start thinking about it immediately," said Prom, founder of Prominent Financial Planning.
Saving early and wisely
Josh Torrance started planning for retirement when he was 21 and became eligible for his employer's 401(k) through his first real job out of college.
"I didn't study finance and didn't know much about money, accounting, financing or the stock market," said Torrance, who lives in Buffalo and works as an operations manager for a utility company. "Guys 50 or maybe older from work said if they could go back, they would have started saving money right out of school, in their mid 20s...It really hits home when you're coming into the workforce and start hearing it from other guys, outside your family."
It's not that Torrance, 28, wasn't occasionally tempted to dip into his pocket. "I can't begin to tell you the temptations. I was single for about four years, so you date, you go out more to parties, take vacations, but I never touched my contribution." Instead, he recognized the long term benefit of making do with what he had. "At the time, it was more of a mental game; you have to fight it through your 20s. I'm going on 30 in about a year, and I'm seeing my balance start to steadily grow. I still find ways to have a nice time, but looking back, I think I made the right decision to not touch it," said Torrance.
Steven Ewell, vice president of Schroeder, Braxton & Vogt Financial Advisors, believes more 20 and 30 year olds are thinking about planning for retirement. "Theyve heard their parents talk about retirement with little or no pensions, so the responsibility falls on the individual's shoulders. I hear 30 year olds say all the time that they dont think they'll get any Social Security benefits, even though they've been paying in for years." Combined, he said, all of this fosters a bigger focus on planning early.
The key isnt to resist temptation, but to moderate it, said Ewell. "Its inevitable you'll splurge on something that doesnt make financial sense. I never encourage a young person to totally starve themselves from the things they want but dont necessarily need. As long as youve put your savings on autopilot and youre building your financial future, you should be allowed to reward yourself. That can be an incredibly powerful incentive."
Rachel Musgrove, 22, a civil engineer who lives in Houston, always has had plenty of self incentive. "When I was babysitting in high school, or when my parents gave me an allowance, I stuck it right into a bank account. My parents definitely encouraged me to do it and taught me how," she said. She began socking money into a stock account when she entered college, and while she splurged here and there on items such as an iPad she never "drained the bank." Her savings have almost doubled in the last year.
When she turned 21 she began working with a financial advisor, who asked her what level of risk she was willing to assume. "I'm very cautious, so we wanted to stay away from really high risk situations." With Musgrove starting her first job, her advisor also helped her understand how to best use her 401(k).
Best ways to save
It's important to save all a person can in tax-deferred accounts such as a 401(k) or tax-exempt account such as a Roth 401(k), said Bill Reichenstein at Baylor University's Hankamer School of Business. These saving vehicles have strong tax advantages compared to saving in a taxable account or non-qualified annuity, he added.
A typical person in their 20s and 30s should have a stock heavy portfolio, Reichenstein said. Target retirement date funds at Vanguard, Fidelity and T. Rowe Price the three largest players in this market each recommends about a 90 percent stock exposure with 30 percent of the stock portfolio invested in foreign stocks.
Joshi, who also considers himself conservative, said he avoids "lavish" purchases such as buying a home. Part of that's simply a matter of mobility because he's moved around considerably for work.
"The other part is I want to make sure I don't overstretch it, especially with the markets going up and down over the last 10 years," he said. "The notion of this generation is that we might not be as invested in the stock market as we should because we're afraid of what happened to our parents."