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Young People All But Ignore Planning for Retirement
By JLP | May 5, 2007
Though the vast majority of eligible baby boomers participate in their 401(k)s, less than a third of workers 25 and under are contributing to these employer sponsored retirement plans. Even worse, only 4% of young workers are maxing out their workplace retirement plans, according to a recent survey by the tax information service CCH.
Ironically, these accounts are more important to young workers than to older Americans. That’s because the majority of younger workers aren’t covered by an old-fashioned guaranteed pension. Moreover, every dollar that 20-somethings save will be more valuable over the course of their lives than the same dollar will be for older workers. That’s because young workers have more time to invest their savings and then let that money grow, tax-deferred.
That quote came from an article found on MSN Money titled Young adults all but ignore 401(k)s, IRAs.
This table from Hewitt and Associates is both telling and disappointing on ALL levels:
ParticipationbyAge.GIF)
Holy cow! Even those who are older than 42 only have an average balance of $93,000, while the median balance is just $44,000. By that age, the average balance should be $250,000 or more.
The question that comes to mind with all of this is:
I have a few ideas:
1. Start teaching and preaching about and personal finance early in life. Personal finance know-how is very important because it won’t do any good for young people to understand the need for retirement planning if they are drowning in credit card debt.
2. Make sure people understand the numbers when it comes to retirement planning. Stuff like how much it is going to cost, and how much is going to need to be saved in order to realistically reach that goal.
3. Automatic enrollment into target funds. I know this sounds anti-free choice, but I almost think we should make retirement savings MANDATORY kind of like social security is. I also think that if we went this route, we could possibly reduce the amount that goes into social security.
Those are a few that I can think of off the top of my head. I realize that number 3 is controversial.
What do you guys think?
Topics: 401(k), Generation X, IRAs, Retirement Planning |
May 5th, 2007 at 1:15 pm
I think you are misinterpreting Hewitt’s chart. Sure, the average boomer only has $93,000 in their workplace 401(k), but they probably have 401(k)s from previous jobs, IRAs, and other retirement investments.
My dad, for example, has been with his employer about a decade. He has a good chunk of money in his current 401(k), albeit no where near enough to retire on, but he has even more in 401(k)s from employers past. He’s also been saving in IRAs since their inception.
May 5th, 2007 at 2:44 pm
Personal Finance should be a course in high school. Basic home-economics doesn’t cover it. I knew that credit cards were bad, but I didn’t understand negative amortization (on my college loans) until a couple years after I’d been paying them. We need to teach and share this information!
Being practical is not easy, but it is important. This is something that we need to teach even before kids hit middle school — in an age appropriate way, of course. Its when kids see their friends and idols have ridiculous toys and stuff that people learn about envy and instant gratification. Just another important lesson that I conveniently dropped on parents and teachers out there.
The problem with retirement planning is that it involves changes for people’s lifestyle which aren’t, well, easy.
If you want to make change easy, you need to do it in a way that impact’s peoples lives in a very small way and provide incentives for people to make the change; incentives that are clear and have real value.
For retirement, number 3 is just another form of social security. I think that far better than that is to just keep social security and increase the amount contributed by a percent and convert the existing accounts over into “stock/target” accounts at a small rate, say 5% per year over the next 20 years until we no longer have regular SS accounts.
If you provided three options like: low, medium, and semi-agressive that were huge index mutual funds with various splits like 80/20, 70/30, 50/50 among stocks/bonds, that would do the trick I think. People couldn’t “opt out” of how the money was invested, just opt for a different risk level.
People will have much more in social security at that point and then we will be able to better handle that boomer/SS crisis because there will be enough money in the pool.
May 5th, 2007 at 2:50 pm
My own personal philosphy — the overconsumption of my peers is what is driving up the performance of stocks. If everybody saved money, all you could ever expect is GDP growth + inflation. 6.5% return — end of story. Instead, we have a historic number of 12%. That extra 5.5% is from consumers spending money on goods produced by half of the companies you own, paying back interest to the other half of companies you own and the ensuing credit expansion from this cycle.
I’ll gladly help anybody interested in personal finance. For everybody else who don’t care, tough luck for them — I’m watching out for myself. Basically, I’m making the bet that by living a simple lifestyle, my investments can grow faster than the taxes I have to pay to support them in welfare later in life.
May 5th, 2007 at 4:10 pm
We need to work on educating young Americans about the dangers of credit card debt and the importance of saving for retirement. I agree with an earlier comment that personal finance should be a mandatory course in high school, linked the article in my blog, need to raise awareness about the falling savings rate and rising debt rates (Also check out this article: Retirement Concerns)
May 5th, 2007 at 4:15 pm
I agree with your 3 steps, particularly #3. I do a lot of benefits reviews and benefits consulting and it’s always my number 1 recommendation. I think it should start at 3% going into a target fund and raise automatically 1% each year. I also like the idea that by default 1/2 of raises go into the 401k. As long as you make it opt-out, it shouldn’t be a problem.
I also agree with your comments on education. We adults are dropping the ball. My next class series under development was going to be for children and teens, but I’ve discovered a free service in Porland that provides classes to these groups so I’m hoping to get involved with them. Kids are our future - they MUST be educated.
May 5th, 2007 at 5:26 pm
I’m 24, have around 30k in retirement (roth ira and 401k) and contribute 14-18% of my 60k salary to retirement to the 401k. hopefully i can offset the norm.
May 5th, 2007 at 6:42 pm
Young Guy: Yeah, I think you’re definitely in the minority with that much in retirement.
I remember when I started my first job a couple years ago. After I had decided on a 10% contribution (+ company match) I asked around to get an idea how much every else was contributing. I was VERY SURPRISED that many people didn’t even put in the minimal amount that would be matched 100%. Honestly, even if you didn’t want to put that money away from retirement, you’re basically throwing money away. The least you could do is take all the money out, take the 10% tax penalty…and have a bit more money.
But honestly, if I didn’t have a personal interest in finance, I really would have no clue where to allocate funds, how to invest, and so forth. It’s ridiculous that they don’t cover this type of stuff in high school, or even college for that matter.
May 5th, 2007 at 7:24 pm
I think these stats are a little misleading. First, of those the lower age group, does this only include young workers who are eligible for 401(k)’s or is all working Gen X/Yers? Also, some people aren’t eligible to get a 401(k) until they have worked at a given company for a certain amount of time.
Second, maxing out your 401(k) contributions is unrealistic for someone just starting out (and probably not worth it). If, by maxing out, they mean hitting that 15K max, for those starting out on a 30-40K salary, this is WAY too much/impossible (35-50% of income) to be putting away for retirement. Also, many companies have very high max limits (like 25%) which is usually unnecessary and crazy to try to reach.
That said, participation in 401(k)’s or other retirement programs is essential. The real questions that should be asked here are “If you are eligible, are you participating?” and “Do you contribute enough to max out the employer contribution?” Those are the salient questions for investors under the age of 30. (To the above two questions, my answer is yes and yes.)
May 5th, 2007 at 8:16 pm
Savvy,
You may be right. It’s hard to tell because they don’t make that distinction.
May 5th, 2007 at 9:35 pm
I have to second Charles’ comments — for those of us just starting out, the thought of contributing in the range of $15K is just not doable. However, I match my employer’s program, and then some — 12% total. Most of my friends are all in the same boat (contributing at least to the match), so there is some hope for Gen Y, or at least for the people I know!
May 5th, 2007 at 10:33 pm
In regards to the “starting out” comments, let’s ask a hypothetical question. How much did you spend when you were going to college with little or no income? Now ask yourself what’s stopping you from living at that level (or that level +20%)? And there you have the answer to how some people can max out 401Ks when starting out.
May 5th, 2007 at 10:54 pm
You are forgetting the policy behind social security which is to provide some level of security to people in retirement no matter what happens to the economy. It is going to be impossible to change even if all the financial advisors keep hammering away at it–social security has done more good for more Americans than any excessive fee laden 401k has done so far–we shall see how 401ks serve the coming generations. You give good advice but you are the exception not the norm. Financial advisors want a piece of the pie that is going into social security and there are too many bad apples out there in my opinion. There needs to be some bedrock and social security serves that purpose very well–just ask the old and people thinking about retirement,
May 5th, 2007 at 10:55 pm
The cost of living has increased dramatically, while real wages have declined. It isn’t possible for many younger Americans to save given these circumstances. Younger folks are spending more money to maintain a lower lifestyle than my generation (as we all know, it is harder to earn when you are younger and you have higher expenses - such as the expense of raising a family).
My generation was lucky enough to benefit from a prior generation of “savers,” whereas, my kids inherited my “debt.”
There are some tough times ahead for the younger generation of Americans. I feel for them, especially since so many of them are working really hard to purchase homes at inflated prices (which are owned primarily by my genration, enabling the younger generation to foot the bill for my generation to funnel money into our retirmenet accounts)….
May 5th, 2007 at 11:14 pm
Here is what I ended up doing that has worked well. When I got out of school I started contributing 7% of my salary. Over the last 6 years, anytime I got a raise I upped my 401k percentage so the net change to my paycheck was zero. This also forced me to maintain a similar standard of living as I did right out of school. With this plan in place I hit the $15k max and the $4k in my Roth this year for the first time!
$19k annual addition @ 10% over 30 years = $3.5 million. Retirement planning done
May 6th, 2007 at 12:21 am
I think it’s actually quite positive that 1/25 of all entry-level workers are able to max out their 401(k)s. $15,500 is a significant chunk of change. Good for them!
And beware of stats that mislead - what’s the average number of open 401(k) accounts, for those who have at least 1? I’ll bet there is additional money stashed away with previous employers or in rollover IRAs that isn’t included in this survey.
May 6th, 2007 at 6:07 am
“In regards to the “starting out” comments, let’s ask a hypothetical question. How much did you spend when you were going to college with little or no income? Now ask yourself what’s stopping you from living at that level (or that level +20%)? And there you have the answer to how some people can max out 401Ks when starting out.”
This is not necessarily true - college students don’t necessarily have no income (I worked all the way through and completely covered all my living expenses with wages) and their expenses are significantly lower - no car, no insurance, cheap rent, no nice work clothes, no transportation costs, cheap entertainment, no student loans, no utilities, no medical insurance.
Finally maxing out a 401(k) is $15K. If your salary is $38K the median for (18-25) and you pay about 20% in taxes that leaves $12K for everything else - you can’t rent an apartment around here for $12K.
May 6th, 2007 at 6:11 am
Oops. Sorry about the math error - you are left with $18.4K. You spend $6K - $12K on rent and you have $6K - $12K for everything else. Could you live on that?
May 6th, 2007 at 7:49 am
I like the third idea. Allow employees to opt-out, not opt-in.
Unfortunately, I suspect this won’t happen until the first large groups of boomers start asking for recipes made with dog food. The changes will be too late for them, but it would get Gen Y into better shape.
May 6th, 2007 at 8:57 am
I don’t think anyone here is actually advocating that young people max out their 401(k). Rather, I think it’s more important to focus on getting started and to do the maximum to at least get the full company match (if the company has one).
May 6th, 2007 at 10:01 am
[...] All Financial Matters ponders why Young People All But Ignore Planning for Retirement, and makes some interesting suggestions on how to remedy this issue. [...]
May 6th, 2007 at 1:44 pm
Edenz, if I was a 22+ year old just out of college with no obligations in life, I sure as hell could live on 18K a year. Not only sure as hell could but DID live on that amount going to school and starting off in San Francisco. (Was less but inflation makes it roughly the same.)
You say you can’t rent an apartment for 12K? I don’t know where you live but I doubt it can beat San Francisco for housing and living expenses. And I check Craiglists for apartments ~1K per month in this area and hundreds come up. Sure most of them are small studios — but during college, you probably only had a dorm room (perhaps even a shared dorm room) or you rented a house together with roommates. Your own studio is a big upgrade from college living.
May 7th, 2007 at 8:17 am
The article quoted in this post says, “Even worse, only 4% of young workers are maxing out their 401Ks…”
So, yes, someone is advocating that young people starting out max out their 401K contributions.
And yes, you can live on 18K a year but it would take very savvy financial planning, and it’s obvious that most people don’t do that.
I have been contributing between 6% and 30% of my income to my various employer’s 401K programs for twenty-five years and I don’t have 250,000.00 total.
Granted, my income was low for most of the time and my 401K took a good hit in 1987, 1997, and between 2000 and 2002.
So you can be responsible with your money and still be worried about retirement.
May 7th, 2007 at 8:53 am
Several thoughts for a Monday morning
LP over at AllFinancialMatters talks about this a little in his post Young People All But Ignore Planning for Retirement.
May 7th, 2007 at 9:11 am
I posted about this article here. I think many of the statistics are dodgy (for example, looking at IRA savings rates only among 401(k)-eligible “workers”), and the alarmism about young people’s savings levels is really unnecessary.
As others have mentioned, it’s hardly unreasonable to fail to max out a 401(k) when that would cut your income nearly in half. This article is focusing on full-time employees 25 and under, which means mostly people who haven’t been in the workplace more than 3 years. How many people earn a starting salary of 100K (which is what you’d have to make to max out your 401(k) at an above-average savings rate of 15%)? Not that many.
The other important thing, I think, is looking at all of the financially smart moves young people can make that don’t involve retirement savings, like paying off student loans (and/or consumer debt) aggressively, saving for a down payment on a first home, building up a cash reserve for an emergency fund, &c.
May 7th, 2007 at 9:18 am
English Major,
Good points. What concerns me more than the fact that young people aren’t maxing out their 401(k) contributions is the fact that ONLY 1/3 are even contributing in the first place.
I’ll admit that if you start young enough, it isn’t necessary to contribute the maximum of $15,000. I think it would be unrealistic to expect that much. I think 10% to 15% of INCOME is a much better barometer. If you can get in the habit of saving a percentage of your income each and every year, the numbers will take care of themselves.
May 7th, 2007 at 9:25 am
IMHO, Mossy, you’re missing the point.
“Edenz, if I was a 22+ year old just out of college with no obligations in life, I sure as hell could live on 18K a year. Not only sure as hell could but DID live on that amount going to school and starting off in San Francisco. (Was less but inflation makes it roughly the same.)
You say you can’t rent an apartment for 12K? I don’t know where you live but I doubt it can beat San Francisco for housing and living expenses. And I check Craiglists for apartments ~1K per month in this area and hundreds come up. Sure most of them are small studios — but during college, you probably only had a dorm room (perhaps even a shared dorm room) or you rented a house together with roommates. Your own studio is a big upgrade from college living. ”
In the age range from 18 to 25, the average salary is $38,000. After paying 20% in taxes, you’re left with approximately $30,000. Take $15K for your retirement, and you’re left with a measly $15K.
Assuming you really did what you said, without any help, I don’t see how it’s possible. Rent is $1k a month, so this leaves you with $3K to live off of for the YEAR. Add food, car insurance, auto payment, utilities, gas, clothing, student loan, apartment insurance, etc and it’s just impossible. Surely you’re kidding.
If you can live off $3K a year, please tell all of us what your secret is and what we’re doing wrong.
As an aside, I contribute the most I can to my 401k. Right now, it’s 6% because I have high interest debt that needs to be paid for first. Once that’s gone, I will contribute close to the max and I should be able to do this by next year living alone and with no assistance.
May 7th, 2007 at 9:27 am
Keep in mind that maxing out a 401(k) simply means contributing the max allowed by the employer, which may be far less than 15k. My first job had a salary of $44k, and my employer had a 401k max contribution of 16%… far less than 15k per year.
May 7th, 2007 at 9:29 am
I agree that the young need to get into the habit of saving now — hopefully 10-15% of their present income.
I do however have to remember that when *I* was in my 20s, I wasn’t good at all about saving. I was caught on the nastiest of debt treadmills and had very low income compared to now. It’s true that I was participating in my 401(k) plan at the different companies I worked for, but to the lowest level. This was because it was a time in my life where I could barely make rent and pay bills as it was.
I wasn’t alone in this, as a lot of my peers were also struggling terribly just to make ends meet.
So I think while it is good to encourage 20-somethings to save, I don’t particularly care for articles that sound condescending of 20-somethings’ lack of saving and play on fear as a motivator. I think the original MSN article falls into that trap. I think it would be far more effective were MSN to come out with creative articles that show 20-something how saving more is within their grasp on a limited budget instead.
DB
May 7th, 2007 at 9:37 am
I’m with eROCK.
Mossy, I’m sure you did some major economizing, but if you could live off the post-rent equivalent of $3K-$5K in SF for an entire year, that doesn’t deserve to a bland assertion in a comment. It deserves to be a detailed guest post.
I also agree, generally, that we need to look at the overall picture of under-25s, including the percentage of income going to debt service (both cc and student loans), the average cost of housing in youth-oriented job markets, and the percentage going to all types of saving.
I don’t doubt that you’ll still probably find a significant shortfall in saving, but not one that so widely outpaces older generations.
May 7th, 2007 at 10:36 am
I think your points 1 and 2 are good, JLP, but not point 3
May 7th, 2007 at 11:36 am
eROCK & HC, you guys need to actually work out the numbers versus *guessing*. You are overestimating the taxes by a lot. The 401K contribution reduces your MAGI so your taxes not only drop but you now qualify for all sorts of tax credits. You may not even have to pay a single dime in taxes (other than SSI/Medicare). Here’s the full breakdown:
Taxes on full 38K
* Social Security + Medicare = 7.4% on 38K: 2812
* CA SDI = 0.30% on 38K : 114
401K contribution: 15.5K
Standard Deduction: 5.1K
Taxable income: 17.4K
After 1K Fderal Personal Exemption: 16.4K
* Federal Tax = 15% on amounts over 7825 = 1286
* Low-Income Retirement Contribution Credit = -1000
* Total Fed Taxes = 286
After 285 CA Personal Exemption: 17115
* CA Tax = 304
* CA Renter credit = -347
* Total CA Taxes = -43
Federal + CA taxes: 243
Federal + CA + SSI/Medicare/CA SDI: 3169
Take home income after 401K + Taxes: 19331 (effective 8% on the total 38K or 14% on the 22.5K)
10K-12K for rent, 7K-9K for non-rent. Subtract 100/mo for utilities and basic groceries, 500-650/mo pays for a fun lifestyle for a single new grad. Again the point is just a few months ago, this 22-year old was eating cold pizza, sharing a house with 5 other people, zero discretionary cash. “Major economizing” is a quantum leap over the college life. I know people who still enjoyed the college lifestyle after graduating. They hung out with their house mates for 4+ years during college, why move out just because they’re making more money?
May 7th, 2007 at 11:55 am
100 for utilities AND basic groceries? Don’t buy it (I lived with roommates for 4+ years and never paid that little), but we’ll take it as given.
But what goes in to that 500-650 per month?
It looks like you don’t pay for for car insurance and student loans, which are a major factor for most under-25s. Maybe YOU don’t pay those, but that’s not reasonable for everyone. Nor do most people get rental credits.
May 7th, 2007 at 12:47 pm
I pay $200 for utilities, ~$200 a month in groceries and eat a very healthy whole food lifestyle.
My car payment is $300 a month, but I pay $600 because it’s a guaranteed 7.9% on my money.
My student loan is $375 a month and my apartment insurance is ~$20 a month.
Adding gas, one activity a month, maybe a book, and you can see how I’m in the red really quick.
If you can survive on $500-$650 a month, good for you! But most college grads have student loans to pay-off and need a car to get to work. It’s unclear how you survive without a car or without loans or with groceries that amount to ~$20 a month.
To me it sounds like someone paid for your loans (maybe you got a full ride or maybe you never went to Uni) and/or car OR you were given a car OR you us public transportation which you haven’t accounted for. Lastly, it sounds like you live with several people and you share the utilities and costs with several others.
My argument stands, there is no way you can live on your own, max out your 401k, and still survive. You’ve yet to prove otherwise.
May 7th, 2007 at 1:09 pm
Student loans — only thing I can say about that is tough crap for financing your education instead of first going to community college and/or AP tests to get half your credits taken care of and working part-time to pay for the remainder. If you buy into the “prestigous and expensive” argument, you made that bed yourself.
Car — had a beater but rarely drove it because I was not rich enough to pay $15 a day for parking in downtown San Francisco. Like 80% of the people working here, I took public transportation. You say that’s a price I didn’t have to pay — nope, that’s a tradeoff for having housing prices 3X the cost of the median in this country. A coworker went back to medical school in New Mexico — his $1300 rent in SF dropped to $600. The difference more than pays for car payments + insurance (unless you were a fool and bought a BMW right out of school).
Rental credit - most people don’t get that but that’s credit against paying the highest taxes in the nation. Someone not living in California may not get that $347 back but they’re probably paying less total taxes — not just income but sales, gas and indirectly property tax. (This is what the rental credit is for — low-income credit for property tax passed onto you by the landlord!)
Basic utilities and expenses - it’s all a matter how what you believe is required. If you think a $100 cellphone plan w/ full web browsing and text message is “required”, well that blows the $100/mo on basics right out the water. Otherwise, all the utility companies have low-income plans your adjusted income could qualify you for. Why should a young single person living in a small rental pay much for electricity at all? If you’re not at work, you’re out and about — turn your gadgets off when you leave.
May 7th, 2007 at 1:20 pm
Since eROCK mentioned groceries, it’s pretty easy to keep costs down if you shop at ethnic grocery stores. The Vietnamese-run and Chinese-run stores here that accept cash only charge 50% less for vegetables compared to major supermarkets and 25% less for meats. Read the blog at sfmoneymusings - her monthly grocery bill was $67 for January!
May 7th, 2007 at 1:24 pm
It may be “tough crap,” (although I think it’s pretty unlikely I’d have gotten the decent job post-undergrad which funnelled me to grad school in two years, and gotten the very well-paying job I had now if I hadn’t made the investment), but your original question was “what’s stopping you from living on college-level expenses?”
That question was answered. There are large fixed costs most young people face.
You should take pride in avoiding those burdens, but it is misleading to suggest that every young person out there would be fine if they just went back to group houses and cold pizza.
May 7th, 2007 at 1:54 pm
[...]All Financial Matters says young people are ignoring retirement planning.[...]
May 7th, 2007 at 2:02 pm
Are you actually saying the grad school would have held it against you if you had spend 2 years in community college to take all general ed classes?
May 7th, 2007 at 2:02 pm
I agree with HC - I can guarantee that I couldn’t have gone to community college/AP credits (they didn’t offer AP credits at my high school) and still gotten the education I recieved, nor an entry level job with a ~$60K salary. Yes I have student loans, but my gross salary more than covers them - it was an excellent investment.
However, I was speaking about the average college graduate - and I still maintain that expecting the $15K max is unrealistic. That being said - the average college graduate can contribute way more than 5.6% - 10 - 15% is very doable. (I’m contributing 14% with a 4% match = 18% total)
May 7th, 2007 at 2:18 pm
When you apply to upper-tier schools, not explicitly, but:
I had working relationships with professors that had lasted from my frosh year, leading to better, more detailed recommendations.
I had the advantage of a common curriculum that focused on argumentation and writing even for social science fields, providing me with better writing samples.
And I had the advantage of a consistently well-ranked institution for the whole of my resume.
Can I say with 100 percent certainty that that got me in? No. But if you think that admissions committees don’t care about long-term academic preparation, you’re kidding yourself.
May 7th, 2007 at 3:05 pm
This is just too good, we all know what happens when people ASSume, right? You’re a knowledgeable person Mossy, no doubt about it, but the way you deliver information is rather condescending.
So let’s take this piece-by-piece:
# MossySF Says:
“Student loans — only thing I can say about that is tough crap for financing your education instead of first going to community college and/or AP tests to get half your credits taken care of and working part-time to pay for the remainder. If you buy into the “prestigous and expensive” argument, you made that bed yourself.”
Tough crap? Interesting word choice. I went to county college for two years, during this time I drove a beater and worked part-time and worked full-time during the summers. I graduated on-time with an Associates of Information Science and was then admitted to one of the top Universities for students who specialize in Info Science (Business Week ranked my School #1 for Info Science).
Not every person makes the most of their High-school days, primarily because their head isn’t on straight. Maybe it’s their parents, maybe it’s their friends, or maybe they just don’t give a damn because they’re young and immature. The average student doesn’t take AP courses and doesn’t get a full-ride or huge scholarships/grants.
While I worked my butt off to get to where I am today, you still have neglected to answer the question regarding how your tuition was covered. I paid each and every penny and continue to do so.
Oh, and I almost forget, I commuted each and every day through my college life to save costs.
I also didn’t go to a prestigious top 20 school nor did I go to any Ivy League school.
“Car — had a beater but rarely drove it because I was not rich enough to pay $15 a day for parking in downtown San Francisco. Like 80% of the people working here, I took public transportation. You say that’s a price I didn’t have to pay — nope, that’s a tradeoff for having housing prices 3X the cost of the median in this country. A coworker went back to medical school in New Mexico — his $1300 rent in SF dropped to $600. The difference more than pays for car payments + insurance (unless you were a fool and bought a BMW right out of school).”
If you add public transportation to your monthly fixed costs, you’re left with even less. Did you have any money left over? Still looks like you’d be in the red, regardless.
My car during county college was a 1991 Ford Explorer. During Christmas of the first year in University, my car blew a head gasket and needed a new engine. I decided to buy a used car that was more reliable and would get me from A to B. I financed it myself, but the rate wasn’t that bad at the time anyway - 7.9%.
“Basic utilities and expenses - it’s all a matter how what you believe is required. If you think a $100 cellphone plan w/ full web browsing and text message is “required”, well that blows the $100/mo on basics right out the water. Otherwise, all the utility companies have low-income plans your adjusted income could qualify you for. Why should a young single person living in a small rental pay much for electricity at all? If you’re not at work, you’re out and about — turn your gadgets off when you leave.”
I bought a phone the other day because I recently quit my job which had provided a paid blackberry. I bought a $20 phone (cheapest they had) and I joined a plan with my parents to cut costs. BTW, I pay $200 in utilities without my cell phone. I paid $75 in gas last month and $47 in electric. Add the cable bill, and viola. OK, sure, I could stop watching TV, but that’s not reasonable nor realistic.
Why are my bills so high? Got me, but I don’t do anything that would be viewed as “wasteful” as I’m a staunch conservative. Maybe it’s because my apartment is rather large? It’s the cheapest in the area so I guess you could say I got lucky.
HC has said it best “You should take pride in avoiding those burdens, but it is misleading to suggest that every young person out there would be fine if they just went back to group houses and cold pizza.”
Mossy, perhaps you don’t intend to be pompous, condescending, or arrogant, but it comes off that way when I read your post(s).
Suggesting, that the average student that makes $38K out of college can contribute the max to a 401k and then saying “tough crap” if they can’t, is not only foolish, it’s unreasonable and unrealistic. Perhaps in your case, it worked, but from personal experience, you’re clearly the minority … which is overwhelmingly evident by the amount of assumptions you make.
**
As an aside, I’d like to point-out that I don’t make $38K a year, but that I personally know how people struggle to get out of debt, pay car loans, pay student loans, and how tough it is to get out their on your own and out of your parents house. It’s not easy and anyone who tells you otherwise is foolish. You contribute to your 401k what you can handle and increase these contributions as your debt decreasing and your yearly salary increases.
Everyones situation is different and just because you see one person that can do it, doesn’t mean that you can do it just as easy. It takes a lot of time and hard-work and when I see comments like Mossy’s ridiculing others instead of lending a helping hand and making helpful suggestions, it makes me sick.
May 7th, 2007 at 3:07 pm
Just a note: Lots of people who go to community college and/or test out of college courses with AP exams still carry student loans.
May 7th, 2007 at 3:18 pm
Bickering aside, I think the comments have left the main points of the article, how much/little young earners save, and how we can increase those participating in savings opportunities.
I am really surprised an organization like Junior Achievement hasn’t added this to there bevy of financial teachings. While the program teaches many youngsters the value of saving, and debt responsibility, they really don’t approach the long-term goals of saving for retirement. They don’t discuss preparing oneself for long term financial protection.
While HC, MossySF and edenz all have valid points as to how young earners can max out their 401(k)s, none of them are touching on how we encourage youth to get involved in saving. Sometimes, just opening that door is all it takes.
As a way to get my other two brothers to begin taking interest in their financial futures, I suggested that my father seed a Roth IRA with $500+ in their names (there are still a few valid IRAs that take such minimal investments) in lieu of birthday/Christmas presents for a year or two. Hopefully, by putting this money in their hands, but slightly out of reach, they will be encouraged to educate themselves on IRAs, and possibly begin adding their own funds to see it grow.
As an aside - why all the focus on 401(k)s while they are young and have a lower earning and lower tax brackets? Why not put some of that “post tax” money into an IRA while they can, and while they are in a lower tax bracket? This can garner huge tax advantages when they are old, and have to start taking out that “pre-tax” money from 401(k)s, as they can offset the “pre-tax” dollars with “post-tax” dollars. This assumes their employers aren’t yet offering Roth 401(k)s.
May 7th, 2007 at 3:32 pm
Jordan,
The article is about both 401(k)s and IRAs and it claims that young people aren’t using either one.
A Roth IRA is probably the way to go unless your company matches your 401(k) contributions. I wouldn’t advise miss out on the match if they can handle the contributions.
May 7th, 2007 at 3:48 pm
Good point JLP, my comment was mostly about the contributors on this topic thus far. They have focused mostly on 401(k).
My employer match (yes, I am a young earner) with a fortune 100 company maxes out at $.50 on the dollar to a max employer contribution of 3% (though they have substantial performance matches that kick in at year end if we do well, they are not guaranteed). Since 6% of my income maxes out my employer’s contribution, this year I started socking money from my yearly raise and bonus into an IRA. Hopefully I can pull on these post-tax funds when I retire to offset those I will have to drawn on from pre-tax earnings.
May 7th, 2007 at 4:10 pm
Jordan–I like the idea of the “Save More Later” plans:
If you start new employees out with a small percentage (say, 3% of gross salary) being taken out of their paychecks, and then automatically increase those contributions by 1% every year until they reach 10%, I suspect very few people would opt out or really feel a pinch.
I would like most of those plans to have a match at least as good as your company’s.
May 7th, 2007 at 4:26 pm
I posted a simple idea that living at “college levels” can save you a lot of money. And that *SOME* people do it and have done it. I got immediately challenged as it being undoable based on fuzzy calculations so I posted the details. No, the college lifestyle is not for everybody but I specifically mentioned a 22yr old without obligations. And since you asked me about more details, I’ll respond.
Yes, I paid 100% for my own college costs. No financial aid, no grants, no scholarships, no money from parents. 3 years of community college, 3 years of the local cheap state college — worked the entire time to pay for it. Saw all my peers in high school who hit the books fulltime graduate and start working 2 years before me — except with student loans they’ll be paying off for decades.
Ok, my responses on student loans were out of line because the entire college industry pisses me off. What a load of crap they’ve given everybody and people have fallen for it hook-line-and-sinker. My company has hired people recently and at no time have we ever considered the quality of the school — other than comments from my coworkers about how these candidates wasted their money in order to have shots for entry-level jobs. I will take back my TOUGH CRAP line about school loans.
Public transportation — was $35/mo for a bus pass back then. It’s probably up to $50/mo now. These past few years, I specifically found an apartment close to work so I could walk it in 15 minutes. Sure the rent is more expensive but not when you count in car payments + insurance + gas.
Cell phones? There’s plenty cheap pre-paid plans. My sister has one that is about $5/mo since she doesn’t gab on the cell all the time. My plan, the local cellphone shop gave me $150 back because I used an old phone. The deals are out there!
I have no idea why utility bills are high. For most new grads, I would expect an apartment just a place to sleep and shower during their hectic go-out-and-get-them lives. I have one cowoker who complains about a $350 gas bill and $200 whatever — a single female living in a 1 bedroom apartment. What the hell do people have hooked up, it’s unfathomable.
Without a doubt, continuing to live the college lifestyle no longer seems appropriate for those who have moved on. I’m no longer living that lifestyle either and cannot go back. But a hypothetical new grad who wants to continue with the shared housing arrangement, it makes a big difference even with student loans to pay back. Shared housing close to work — the place might be more expensive but prorated over multiple people is probably cheaper than your own place out in suburbia. Now you’re in an urban setting with more/cheaper options for food, goods, services, entertainment. The big savings is the car — $300 for payments, $200 for insurance, $100 for gas — $7200 a year. (I’m sure some of you probably pay way more for gas.) Pro-rate this pre-tax and it’s $9K extra that could go into a 401K — you don’t need much more to max out it out. The automobile is sure as daylight is the best way to put yourself in a financial hole.
Finally, let’s get some perspective. Perhaps because we’re all online, we’re used to people making $XX to afford computers and broadband and all that goes with being in the computer age. However, the median income in this country is $23K. HALF the people in this country live on the hypothetical 38K-MAX 401K income!!! I’m not saying you have to live like them — just saying it’s possible some people can live with that number as their expenses even though they make more.
May 7th, 2007 at 5:23 pm
Mossy … thanks for the reply! Now you’re speaking my language.
Like you, I’m also fed-up with the “college industry”. The costs are overwhelming … even for you and I who both decided to go to county first!
When push comes to shove, no one is really going to look at what school you went to … unless it’s top 10 maybe 20.
I went to a private Uni and paid big bucks, but they also provided some unique work experiences and internships I would never have found in a state school. That said, I’m happy about my decision, but like you pointed-out the costs are staggering … I can’t even imagine how someone majoring in “liberal arts” or “art and music” pay-off their college loans!!!???
May 8th, 2007 at 6:44 am
Is it wrong I fall into the 25 & under category but my balance is higher (and a higher percentage) than the average? Well, maybe not wrong, but it certainly makes me happy…
JLP:
1. Requiring classes would be a disaster for some children. The educational system isn’t the same everywhere, so in one area they could create financial geniuses - in another they could just be handing out report cards to pass state minimums. Ultimately, *this is a parent’s job.*
2. A lot of people like to use some college kid that’s managed to sock away a few grand for retirement by 20. Sometimes, they say how it’s all on their own - in other cases they don’t, which means they aren’t talking about any extra assistance mom and dad may be giving them. When I was in high school I heard about retiring a millionaire by saving x amount per month until you were 50. I couldn’t afford to at the time, but it never escaped my thought (so once I could, I had the money set aside and ready).
3. Drop social security. Require a retirement fund. The Gov’t doesn’t need to be taking care of us - *WE* need to be taking care of us. I know it’s anti-choice, but we’re paying for social security now when we may or may not ever see a dime - why should I contribute to something I may not benefit from? (AH! Economics!) At the same time, in order to compensate for a large number of people who didn’t save for retirement, if we weren’t paying SS benefits, we’d be reading about how the government “dropped the ball” on retirement for the boomers…
Mossy:
I’m with you. I hate the state of schools, the costs, the bullshit textbook prices - but I pay out of pocket for everything. I have a couple student loans from prior, but they’ll be long gone before other people I know who decided “expensive = better.”
And living the college lifestyle? I did until I got married, then we still try to live cheaper and manage our time and money better - with a baby on the way, it’s still a matter of “smart-thinking.” We buy our baby items used (if they weren’t gifted) and we don’t waste time with name-brand high-$$$-tag items that they’ll grow out of in a few months.
Buy used, live cheap - how is that not possible out of college? We still aim for used, cheap, overstock, gently used items. We’ve saved thousands on everything we own by not going the “must be brand new, must be name brand” routes some of our friends went.
May 8th, 2007 at 9:12 am
Looking at some of the comment wars, I’m almost afraid to post, LOL. I graduated from college nearly 20 yrs ago into an entry level marketing job with a Fortune 500 company making $35K, which I suppose for back then was pretty good money. But, I moved to NYC, the most expensive place this side of the earth. Did I save a dime in my 20’s? Absolutely not. And its not like I was living that much above my college standard - in some ways college was much nicer.
College: Three hot meals a day, libraries & student lounges to hang out in, cheap booze, beer drinking girls, etc.
NYC: Noisy, dirty, crazy roomates (I mean the insane crazy, not party crazy), showhorned into shoebox-size apt, commute by filthy, hot subway, work non-stop, travel non-stop, deli food all day, gotta wear suits to work, & girls who drink expensive mixed-drinks (on your tab).
In other words, I would have gladly maintained the pre-graduation lifestyle, but that is not really an option once you become an adult. Your lifestyle changes in fundamental ways that preclude living like a fratboy for more than a couple yrs after graduating.
I also graduated saddled with enormous student loans, thanks to top-notch education from one of the country’s most highly-ranked institutions.
You could say that I started with a big deficit. Loads of debt, expensive but crappy quality of life, years before I could pay off debt and start saving. But, Would I do it all over again the same way?
You betcha!!! I’m living proof that it is possible to start slow and finish strong. All the sacrifices made in my 20’s were set-up for blasting off in my 30’s and 40’s.
I guess if there is a point to this post, its that there is no one way to go about preparing for the future. Some of you will say that going into debt to get a fancy private college degree was a waste of money - I say it has helped get me in doors I never could have opened on my own. Others might say that young people should try to live in low cost regions - I would say that being in NYC is a big part of my success. Others might say that you should start saving from day one after graduation - I’d say nothing wrong with that but sometimes it just ain’t gonna happen and as long as you realize you’re gonna have to make up for it later then c’est la vie.
I really don’t believe in one size fits all answers.
May 8th, 2007 at 12:03 pm
eROCK: I majored in “liberal arts” and got a demanding and well-compensated job.
there are exceptions to the rules.
Miguel: I agree with you about the school part - my school and the alum connections have gotten my foot in the door on crucial occasions. And that has allowed me to get me a great job. The “getting your foot in the door” cannot be underestimated.
May 8th, 2007 at 12:50 pm
@ Wanda - BTW, I’m a liberal arts graduate too. So, basically I went into thousands in debt to graduate with a major many people would call “utterly useless” especially since I never even pursued a career in my major.
Yet, I would describe myself as a financial overachiever - in the 99th percentile by age 40 on any measure you care to analyze.
Not saying that my way is the right way, just saying that there really is no “right” way.
I believe that you have to constantly look at the hand you’re dealt, and then figure out how to play to your strengths and mitigate your weaknesses. Simple - and yet not so simple. Because that leaves many potential permutations of choices and avenues depending on who you are, where you are, and what your priorities are.
May 9th, 2007 at 7:54 pm
[...] Young adults all but ignore 401(k)s, IRAs (via AllFinancialMatters) Several recent studies say the vast majority of young workers are failing to sign up for myriad tax-advantaged accounts, potentially leaving hundreds if not thousands of dollars of benefits on the table. [...]
May 10th, 2007 at 5:34 pm
[...] JLP at AllFinancialMatters has written about Young People All But Ignore Planning for Retirement. It’s quite distressing when you actually see the numbers presented. [...]
May 13th, 2007 at 8:14 am
[...] Young People All But Ignore Planning for Retirement JLP from All Financial Matters quotes an MSN article which in turn quotes a Hewitt study describing how the young’uns just aren’t putting enough away for retirement. [...]
May 13th, 2007 at 9:23 am
[...] Young People All But Ignore Planning for Retirement JLP from All Financial Matters quotes an MSN article which in turn quotes a Hewitt study describing how the young’uns just aren’t putting enough away for retirement. [...]
May 29th, 2007 at 4:36 am
I thought I was seriously behind. I’m 24 years old. I make 65K/year. I put 8% of my salary into my 401K plan (have about 20K). I manage my retirement constantly. So far, since I started investing I been making greater than 20% return. I always stay on top of the market. But I also have 20K in student loans and 5K in credit cards. Sometimes paying that debt seems difficult. But is good to know that I’m not alone.
June 13th, 2007 at 3:14 pm
I agree that there should be education for young people. Even if you start saving 5% of your income into a RothIRA at 15 with your first paycheck, you’ll never get used to having the money there and it will be a lot easier to keep it up as your income increases.
September 8th, 2007 at 10:22 am
[...] Though the vast majority of eligible baby boomers participate in their 401(k)s, less than a third of workers 25 and under are contributing to these employer sponsored retirement plans. Even worse, only 4% of young workers are maxing out … …more [...]
July 2nd, 2008 at 12:43 pm
I stumbled upon this blog article and I am appalled at the way young people are viewed. It is tough out there to *max* out our 401k. the article should have shown the average income for 25* year olds and probably discussed how we can’t afford health insurance, let alone retirement savings! I make 38k per year and after my 10% 401k contribustion, I also pay taxes and insurance which equal to be 3.5 times what my 401k contribution is. Add rent, utilities and other living expenses & 20 somethings have their work cut out for them. I haven’t seen a raise in 3 years, neither have any of my co-workers. the market and economics are changing drastically everyday.