Generation Y Not Saving for Retirement
By Ric Edelman
Less than one-third of workers in the 18 to 25 age group are participating in their employer retirement plan. Worse, according to the study from Hewitt and Associates, of those who are contributing, 35% of the money is going into fixed income securities such as government bonds, CDs and money market investments. In fact, young workers are placing more of their money into fixed income investments than people twice their age.
Failing to invest while young, and failing to make the right investment choices, will prove extremely expensive later on. Consider four 20-year-olds:
- Anne does not join her retirement plan until she is 40 years old. When she finally joins, she places her money into bonds.
- Barbara also does not begin saving for retirement until age 40, but she chooses stocks when she starts investing.
- Carol joins her employer plan as soon as she starts her career at age 20. She chooses bonds.
- Diane also invests in her employer plan starting at age 20, and she chooses stocks.
Let’s assume that all four women begin their careers with a $20,000 salary. Let’s also assume they each get 3% annual raises and, when they contribute, they each place 5% of their pay into their retirement plans. Finally, we’ll assume they retire at age 65 and throughout their years of participation, they earn the average annual returns offered by bonds and stocks (5.08% for bonds, based on the Lehmann Brothers Aggregate Bond Index since 1926, and 10.46% for stocks, based on the S&P 500 Stock Index for the same period*).
Here are the results:
- Anne began saving at age 40 and invested in bonds.
She has $118,000 at age 65.
- Barbara began saving at age 40 and invested in stocks.
She has $240,000 at age 65.
- Carol began saving at age 20 and invested in bonds.
She has $265,000 at age 65.
- Diane began saving at age 20 and invested in stocks.
She has $1,128,000 at age 65.
The message is clear: The sooner you begin to save, and the more you emphasize equities for your long-term savings, the more you can expect to accumulate. It’s a message that today’s young workers need to learn. Spread the word.
*An Index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes.Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.