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Boomers' Nightmare is Generation Y's Opportunity

Time to State Saving for Retirement is Now

By Fred Yager
ConsumerAffairs.com

November 3, 2006

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When you're in your 20s and 30s and just beginning your career or starting a family, chances are the last thing on your mind is retirement.

You're still paying off college loans or trying to buy a home. You may even be thinking about putting money aside for your children's college fund. But retirement, you'll have plenty of time to deal with that later, right?

Wrong.

In fact, if you don't start saving for retirement by your mid 30s, you're setting yourself up for a situation that is currently keeping baby boomers up at night -- the possibility of outliving their money. That's because many of them will live as long in retirement as they did during their work years.

Unfortunately, many of the boomers didn't start saving for retirement in their 30s -- and succeeding generations haven't done much better. According to the U.S. government, the national savings rate has been falling steadily for the last two decades and last year went into negative territory for the first time since the Great Depression.

That means Americans on a whole are spending more than they earn and therefore have no money left for savings. How bad is it? Pretty bad. In fact, the United States has the lowest savings rate of any industrialized nation.

If you're now in your 20s and 30s, you still have time to heed this warning before it's too late.

That's because you can still take advantage of something called "the miracle of compounding." And believe me it's a miracle all right, but not for the reasons originally intended. In fact, it would be a miracle if you knew anyone who actually took advantage of it, which is a shame because it's all there for the taking.

What is the "miracle of compounding?" It's simply this. When you put money into a savings or investment account, you earn interest or a rate of return and that amount is added to your original contribution.

This combined amount continues to earn even more interest or rate of return which is again added on.

Getting interest on top of interest is what's known as compounding. If this happens over a number of years, the returns you get from compounding will eventually be even greater than your contributions. And if you continue to make regular contributions, it will grow even bigger.

All this will vary according to three things --
• the amount of your savings or investment contributions,
• the interest returned on those savings or investments and
• time.

Time is perhaps the most crucial.

Time Really Is Money

Let's say at age 35 you start to put away just $50 a month for retirement. That's all, just $50 a month. Now you take that money and put it into a mutual fund that does really well and returns on average 12 percent a year, which could happen.

How much do you think you'll have by the time you retire at age 65?

After 30 years of socking away that small $50 a month in savings, which only totals $18,000, your total next egg has now grown to an astonishing $176,545 because of the miracle of compounding.

The key thing to remember is that this is only possible if you start saving for retirement in your 30s because in order for the miracle of compounding to work, you need time and that's the one thing you won't have if you wait until your 40s or 50s to start saving.

For people in their 30s, one of the best ways of saving for retirement is with a 401k plan your company provides or a 403b if you work for a non-profit. Still, at least one third of all those eligible to participate in their company's plan never even sign up.

Knowing this, a lot of employers now automatically enroll their workers into a 401k plan and if the employee doesn't want to be in it, they have to take action to opt out. This gets around the inertia factor that stops many people from taking that first step to enroll.

If you have access to a 401(k) plan, sign up immediately and save as much as you can -- at least the amount the company agrees to match. And if you're in your 30s, pick a mutual fund that will give you a decent return, which means it will probably be mostly stocks and therefore riskier than bond funds. But you're investing for the long haul so you can afford a few down years because stocks perform better over the long term.

Empty Pockets

Now the key question is how do you convince those who never seem to have any money left at the end of the month to contribute money to a retirement fund, such as a 401k plan or an IRA? The first thing you have to do is show them that it's possible and then come up with a plan to make it happen.

That means you have to have a budget. Everybody needs a budget. If you don't have a budget, you're going to spend more than you earn and if you need proof, just look at our country's pathetic negative savings rate.

There are studies that show the simple act of writing down a budget plan increases the likelihood that you'll actually stick to it.

It's kind of like making a shopping list before you go to the store. So start writing. Tally up what you have to spend in order to survive and subtract it from what you earn. What's left will be your disposable income.

This is where all that discipline comes in. You have a choice. You can either use that money to buy something now, or save at least some of it for retirement later. You can have your little luxuries now or the bare essentials later. It's all up to you.

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