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Capitalize when time is on your side
© St. Petersburg Times, Young single people have the best opportunity to create a secure retirement for themselves, but often they have the least interest in doing it. "A lot of people my age are more interested in the present, the here and now," said Eric McClendon, 30, a teacher at Largo High School. "They're not thinking about the 401(k) because they figure retirement is so far off." But McClendon, who teaches students with disabilities, joined the first retirement savings plan he was offered at an insurance company where he worked to put himself through college. Now he saves part of his salary through the comparable 403(b) savings plan school systems offer their employees. "It's better to plan for the future," he said. "We cannot depend on Social Security. I know it is not going to be enough." Young workers have time on their side, which means the power of compounding works in their favor. A 22-year-old who tucks $2,000 a year into an individual retirement account and earns an 8 percent annual return will have $659,166 in savings by age 65 at a cost of just $86,000. A worker who waits until 40 to start saving would have to put aside $225,415, a little more than $9,000 a year, to end up with the same result. "Sometimes young people feel immortal," said Frances Doyle, a certified public accountant with Omni Tax and Financial Advisors in Tampa. "But if they started very young and invested on a regular basis, even a low dollar amount, they could assure a secure retirement." Financial advisers recommend that workers enroll in a retirement savings plan as soon as they become eligible. Because many employers match employee contributions, failing to sign up is passing up free money. Also important: Signing up early is the most painless way to adjust to a smaller paycheck. "If you don't get used to having the money, you never miss it," said Greg Rosica, a certified public accountant with Arthur Andersen in Tampa. The longer you wait, the more difficult it becomes to give up the money, he said. "People get married, have kids and have all these additional expenses so it becomes harder and harder to start." Some people start small, setting aside just 1 percent or 2 percent of their paychecks, then increase the percentage each time they get a raise. That way they never get accustomed to having the extra income to spend. But the need to save for retirement has to be balanced against other priorities. Paying off debt is the top priority for six out of 10 Generation Xers, according to a recent survey by Yankelovich Partners. The group, which encompasses those ages 21 to 34, said they owed an average of $2,000 apiece on credit cards. McClendon knows about that. "I have to live very conservatively," said McClendon, who is single. In addition to paying down credit card debt and student loans, he is trying to save enough money to go to graduate school. Financial advisers agree that paying off high-interest debt and saving for retirement are important. A $100 reduction in debt increases net worth as much as a $100 deposit in a savings account, but not as much as a $100 deposit in a 401(k) plan with a $50 employer match. If the credit card charges 22 percent interest, paying it off offers a 22 percent risk-free return on your investment. Along with paying off debt, it is important for young people to develop smart spending habits to minimize the new debt they accumulate. "Everyday spending decisions, especially credit-based ones, will do far more harm to one's financial future than any investment decisions one might ever make," said Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego. The experts recommend creating an emergency fund that can be tapped as an alternative to putting that car repair or dental bill on a credit card. McClendon said he learned about saving for retirement in a high school economics class. He also got an introduction to the stock market through the Stock Market Game, an exercise in which students compete based on the performance of their imaginary portfolios. "They explained that it will fluctuate," he said. "If you pull money out, it will go up and you'll end up losing money." Some young people say they started saving as a result of their parents' influence. "My dad told me I should because he was starting to invest," said Bryan Marks, 27, of St. Petersburg. "He said, "If I would have started when I was your age, I'd have a million dollars right now.' " Marks, a commercial artist and marketing specialist, made his first mutual fund investment five years ago from money he earned playing guitar in a rock band. He still socks away money regularly in mutual funds as well as in his 401(k) savings plan at work. McClendon followed the experts' advice when he changed jobs. Instead of cashing out his retirement savings plan, he rolled it over to an individual retirement account, where it remains invested in stock mutual funds. "I did the research and I know if I had taken the money out, the government would have taken so much in taxes," he said. Withdrawals from savings plans are taxed at regular income tax rates, plus a 10 percent penalty for those younger than 591/2. But McClendon is not as aggressive with his investments as he could be based on his age. He puts his new retirement savings contributions into a fixed-rate fund that he says pays about 5 percent interest. "I wanted to be on the safe side because the stock market was having a lot of trouble," he said. "When the economy appears to be improving, I'll make the change."
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From the Times Business report
From the AP
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