Should Young Adults Really Be Saving for Retirement? | 401ks

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Conventional wisdom says workers should begin saving for retirement as early as possible. However, a working paper recently published by the National Bureau of Economic Research suggests that the late 30s or early 40s could be the optimal age for college-educated workers to start funding retirement accounts.


“It’s a unique perspective and something to consider,” says Marco Sarkovich, an associate attorney with Slate Law Group in San Diego. While Sarkovich believes it’s always better to begin saving early, he understands why waiting may appeal to some people. “You want to be able to enjoy the fruits of what you earn,” he says.

The paper suggests that auto-enrolling young adults into workplace retirement plans could be a mistake given current near-zero interest rates, the increased wages college-educated workers can expect to earn later in life and a high Social Security income replacement rate. Given these factors, young adults may find it better to spend money on more immediate needs rather than set aside cash for retirement.

While the paper has an intriguing premise, some finance professionals worry about its practical implications. “Telling people not to save and telling them they’ll be fine is, in a certain sense, a dangerous proposition,” says Jon Anderson, head of retirement plan solutions for Cetera Financial Group.

Anderson says there is little risk in young adults over-saving early in life, and setting aside money at the start of a career is a smart way to prepare for the future.

Future Earnings Aren’t Guaranteed

An uncertain future is one reason to prioritize retirement savings at a young age.

“You can’t assume you’ll have a higher income down the road,” says Elizabeth Evans, a certified financial planner and managing partner of advisory firm Evans May Wealth in Carmel, Indiana.

Even college-educated workers could fall victim to a layoff during an economic downturn, and a disability could derail anyone’s career. More than a quarter of 20-year-olds will become disabled prior to retirement, according to the Social Security Administration. For these reasons, finance experts advise against waiting any longer than necessary to save for retirement.

“People should look to make sure they have a sizable emergency fund to cover six months to a year of expenses and to pay off all of their high-interest debt,” says Jay Jumper, CEO of retirement planning firm Future Capital in Chattanooga, Tennessee. “If those two things are covered, then anyone can get started saving for retirement, regardless of their age.”

Good Habits Start Early

Waiting until later in life to begin saving for retirement, as the NBER paper suggests, only works if people have adequate income to invest and are disciplined enough to forego spending for saving.

“It’s really assuming rational behavior for everyone,” Anderson says. “That’s a big challenge.”

If someone has built their lifestyle around spending the majority of their income, it can be difficult to shift to saving a significant percentage for retirement. Workers may find it is easier to build retirement savings if it’s a priority right from the start.

Evans suggests people of all ages devote 10% to 20% of their income to improving their net worth. That could mean paying down debt, investing or saving for retirement. For young adults who think they have time, she notes that the longer money is in the market, the more likely it is to grow substantially.

“If you wait, you could miss out on one of the greatest bull markets,” she cautions.

Auto-Enrollment Boosts Employee Participation Rates

Although the NBER paper casts doubt on the wisdom of auto-enrolling young workers in workplace retirement accounts, auto enrollment has been shown to improve savings rates. Data from Vanguard Research finds that participation rates for plans with automatic enrollment are triple those for plans with voluntary enrollment.

The Vanguard study looked at 813,918 employees across 520 plans. These workers were newly hired in 2017-2019 and were still working at the same company as of June 2020. While only 28% of workers at companies with voluntary enrollment in a retirement plan choose to participate initially, 91% of workers at companies with automatic enrollment chose to save for retirement in their workplace plan. What’s more, after three years, 92% of employees at companies with auto enrollment plans were saving for retirement compared to 29% of workers at firms with voluntary enrollment plans.

“Money doesn’t always equal fulfillment, but I believe money provides flexibility,” Evans says. Using auto-enrollment to encourage saving early in life could give people the option to shift to other priorities later, such as college savings for a child, travel or taking an early retirement.

Balance Retirement With Other Life Goals

Saving for retirement doesn’t have to mean living a miserly existence. “Good budgeting should always strike a balance between saving and lifestyle,” Jumper says.

Young adults should consider their expenses, emergency savings and lifestyle preferences when determining how much to set aside for retirement, Sarkovich advises. If someone has high expenses, they should make sure they have enough money in liquid accounts – such as a money market or high-yield savings – in the event of an emergency.

Otherwise, young workers may be tempted to pull money out of a retirement account to pay for unexpected or emergency expenses. Doing so could not only derail their retirement savings plan but could result in a tax penalty.

As they prepare a budget, young adults may be tempted to see retirement as something far in the future and an expense that can wait. However, in doing so, workers could miss out on not only a large nest egg, but something else as well. As Jumper notes, “Many people ignore how good it feels to be financially stable.”

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