By Bryan Borzykowski
It has been repeated so often that many people think it’s true: Millennials don’t care about retirement saving. But research paints a different picture.
Today’s 20- and 30-somethings care deeply about saving. A 2014 Transamerica Center for Retirement Studiessurveyfound that 76 percent of millennials discuss saving for retirement with family and friends. And 81 percent are worried that Social Security will not be available when they retire.
Millennials have seen the dangers of not saving enough, according to George Walper, CEO of Spectrem Group, a Chicago-area financial sector–focused consulting firm. Many have parents who are struggling in retirement, and they’ve also seen how a financial crisis can wipe out years of saving. “They see the importance of it, but anybody who’s coming out of college is vying with so many different things for their money,” he said. “Cars, loans and houses are all competing factors.”
With so many other, more immediate financial priorities, such as student loan debt and credit card payments, many millennials find it impossible to save. So how can they start? Here are three tips:
1. Set Priorities
The first priority—after shelter, food and clothing—should be paying down debt, according to Lorraine Fox, director of wealth management for Aspiriant, a San Francisco–based financial advisory firm. Many credit cards come with astronomically high interest rates, while outstanding student loans make it more difficult to buy big-ticket things, such as a house.
Carrying a large debt load is also mentally draining. “Debt is a huge burden that people feel emotionally, so it’s a good idea to work on relieving that burden,” said Fox.
While you’re paying off debt,create a planfor larger life and financial goals. That could mean saving for retirement, but also buying a car, purchasing a house, having money for children and more. Talk with a financial adviser or sit down with a pen and paper and plan how you’ll achieve those goals. Write down what sources of income are coming and what’s going out—try to project into the future, too—and decide how much should be saved where.
Once you take into account all of your family’s priorities, it will become a lot clearer how much you need to save for the future.That makes it easier to start saving early, because you’ll know how much you need to put away for each goal.
“If someone wants to buy a house in 10 years, they need to get to work on it,” said Fox. “Set those goals and start getting ahead of them by saving every month.”
Some people find it easier to save for multiple things by opening several bank accounts, Fox said. Others accumulate their savings in one place and keep track of how much they’re supposed to set aside for their different priorities.
“It really depends on how the individual likes to save,” she said.
2. Get Compounding
Despite these competing priorities, there is a strong case to be made for saving early: compounding interest. Albert Einstein is said to have called compounding “the greatest mathematical discovery of all time,” and it’s difficult to find an investor who would disagree.
Compounding refers to investment gains being made on top of investment gains. Here’s how it works: Say you put $5,200 into a savings account and it grows by 5 percent over 12 months. You’ll end the year with $5,460. In year two you’ll make that same 5 percent gain, but on the $5,460, which means your account will grow by $273 (rather than the $260 it grew in the first year).
Over time, those gains will multiply.If you don’t put another dime into your account for 25 years, and returns remain, on average, 5 percent per year, that initial $5,200 will grow to $17,610. If you put in $5,200 every year for 25 years, the account will grow to $278,200.
“You will start to see that accumulation,” said William Walsh, director of the Joseph I. Lubin School of Accounting at Syracuse University. “It may sound ridiculous to put as little away as $100 a week, but it’s going to grow.”
3. Make Use Of The 401(k)
For millennials, saving is actually not as hard as it may seem. Most companies now offer 401(k) plans, which allow employees to deposit money directly from a paycheck into a retirement account. Many employers also match contributions, so if an employee is putting 5 percent of his or her pay into an account, the company will also put in 5 percent. That money compounds tax-free, said Walsh, though the employee will owe some tax when the money is eventually withdrawn in retirement.
Tax-free growth and matching contributions should be hard to pass up, but what about those car and debt payments? Walsh advises millennials to base their goals on the money generatedafterthat 401(k) payment is made. Because those contributions are taken directly out of your paycheck, you’ll never actually have that money in your hands.
“Take it off the top and you’ll never miss it,” he said. “You can then continue to allocate your after-tax money to pay down loans.”
Ultimately, millennials will save for retirement, said Walper. And they may end up saving more than their parents, because they understand the dangers of debt, know they have to work at saving and are well aware of what can happen when things go awry.
“I’m optimistic about this group,” he said. “They’re cautious but not conservative, and it’s just about being clear on what they have to do to set (realistic) goals.”
Bryan Borzykowski’s writing focuses on investing, personal finance, small business and technology. His work has appeared in the New York Times, CNBC, CNNMoney and BBC Capital, among other publications. He’s also written three personal finance books. Follow Bryan on Twitter: @bborzyko.
