Don’t Wait: Start Young, Be Aggressive with Retirement Planning

YOUNGSTOWN, Ohio – For many, a question about one’s retirement planning might elicit a short, dismissive laugh.

In May, Forbes reported more than 75% of Americans have retirement savings short of conservative targets. Another 21% aren’t saving at all.

The good news is more young people are starting retirement savings earlier. A recent survey by the Transamerica Center for Retirement Studies found 70% of Generation Z respondents are beginning their retirement savings when they’re 19 years old. The average millennial began at 25, compared to age 30 for Gen X’ers, according to the survey.

In the Mahoning and Shenango valleys, financial professionals see more young people trickle in to discuss retirement planning. Still, most of their retirement customers tend to be in their 50s and 60s, they say.

Committing early to save for retirement can be challenging for young professionals, who are usually more concerned with immediate bills and expenses, says Stephen Daprile, chief financial officer and agent at Gem-Young Insurance & Wealth Advisors, Canfield. As retirement gets closer, however, “You start thinking about it more,” he says.

College debt is another “big component” of what prevents young professionals from saving early, he says.

“We are leaving with way more college debt than we ever have seen in a lifetime,” Daprile says. “The inflation for college is well above the inflation for just the general rise of goods and services in this country.”

Graduates overwhelmed by student debt can have difficulty putting 5% [of their pay] toward retirement savings when 10% is going to pay down college debt, he says.

Compared to baby boomers and older members of Generation X, younger generations are carrying “significantly more debt,” agrees Sean Gibbon, wealth adviser at JFS Wealth Advisors, Hermitage, Pa. Some of the young professionals he works with have $200,000 to $300,000 in student loans, “plus a mortgage, plus a baby on the way. So you’ve got to save for their college,” he says.

“Some people are very diligent about saving and paying down debt aggressively. Some people are not,” Gibbon says. “So it’s a mixed bag, unfortunately.”

But starting to save for retirement at a young age, even if just a small amount, can benefit in the long run because of compound interest – the addition of interest to the principal sum of an investment.

Setting aside extra dollars in an investment vehicle “adds up so fast,” says Tim Petrey, managing partner at HD Davis CPAs LLC, Liberty Township.

Leveraging compound interest helps individuals avoid lifestyle creep, which Petrey says, is the “most dangerous thing for young professionals.”

Lifestyle creep is a phenomenon where, as professionals earn more, that drives them to make more expansive lifestyle choices, such as a new car, larger home or nicer clothes.

“It happens in these tiny little chunks. It’s death by 1,000 cuts,” Petrey says. “If you can avoid lifestyle creep, then all of a sudden you’re 10 years into your career and you’re set. Your first 10 years can set the tone for the rest of your working career.”

Petrey, who is 34, sees the difference between those who began early and the ones who lived beyond their means. Poor decisions lead to heavy debt obligations, which prevent people from having the freedom to pick the careers and jobs they love, he says.

For those who began to save early, they can find a role “where you’re doing something you’re truly passionate about” at 50, he says.

Those who missed the boat in their first 10 to 15 years of work can still achieve their goals. But it’s harder. Petrey likens it to getting back in shape after working a sedentary job for too long, which takes more work than if one exercised regularly and ate a healthful diet.

“It’s boring. It’s not sexy. It’s just doing consistently the right things over and over,” he says. “It’s the very basic stuff that you do on a regular basis that helps you win.”

John Ryan, a financial associate at Mediate Financial Services Inc., Canfield, says younger customers coming in for advice are usually driven by a life event such as marriage or having a child. Others just want to make sure they’re doing things right.

“Usually, they’re set up already with their 401(k),” he says. “It’s just they want to get more diversified.”

Ryan advises younger customers to have their life insurance in order and to stick with a strict budget. Those in their 20s and 30s should target having at least the amount of their annual salary saved. That increases to three times their salary in their 40s, and six to seven times in their 60s, he says.

He recommends young professionals read “The Psychology of Money, by Morgan Housel,” which focuses on financial behavior rather than strict knowledge.

“That’s a good book to get your feet wet in learning the basics,” he says.

Establishing and sticking to a budget helps to  identify and cut frivolous spending, says Gibbon from JFS.

“It also allows you to see where those gaps are,” he says. “It tells you where that money’s going and potentially how much you could be putting towards something else.”

Compound interest is the most important thing a young professional can learn, both for investing and paying off debt, Gibbon says. Individuals who pay the minimum amount on their student loans for the long term end up sometimes paying twice the original loan, he says.

“You’re really just burning money at that point,” he says.

Conversely, compound interest benefits long-term investments, he says. A 25-year-old who puts $10,000 annually into an account at a 6% rate for 15 years will see that investment grow to about $1,060,000 by age 65.

That compares to someone who starts at 35 saving $10,000 a year at the same rate until age 65, but will only have $840,000.

“This compounding interest has a ripple effect over time,” he says. “The earlier you start paying down on those debts, the earlier you start saving aggressively, the better off you’ll be down the road.”

How an individual saves is entirely situational. While a 401(k) with company match is the ideal investment vehicle, not all employers offer that benefit to their employees.

“It’s not the employer’s responsibility to provide you with a retirement plan,” says HD Davis’ Petrey. “It’s your responsibility to provide more value to your employer for them to either pay you more, or for them to put you in a position where the retirement plan is an option.”

That said, workforce challenges should prompt employers to “pull out all the stops” to attracting and retaining talent. Offering robust retirement plans is part of that. If such a plan isn’t possible, employers should help employees find ways to earn more so they can invest on their own.

The advisers all agree that putting the maximum amount into a 401(k) is the best move to take advantage of the match and tax breaks.

“It’s free money. It’s a benefit that they’re trying to provide to you,” Daprile says. “So making sure you do that and leveraging that appropriately puts you in good shape.”

When a 401(k) is unavailable, other options include an investment retirement account, or IRA, as well as a brokerage account, Petrey adds. Agencies like HD Davis can help clients to determine which works best for their goals and resources.

“If you need help trying to find a proper investment solution for that retirement fund, align yourself with a professional. It’s worth the money,” agrees Daprile.

Gem-Young has been establishing new processes for younger customers, whose needs and objectives differ from older ones.

“The big thing is managing cash, focusing on budgets, and deploying the right investment products for what their financial goals might be,” Daprile says. “We like to focus on the relationship between fees and performance and risk tolerance, and marrying all three of those and deploy them for specific situations.”

Before Daprile renders advice, he works with customers to gather information about their situations to make the best decisions, he says. While the ideal situation is no mortgage, no debt and putting 10% to 20% of one’s income to retirement, “that’s not reality.

“We have other bills to pay. We have other things to do,” he says. “But as they say in this industry, you’ve got to pay yourself first.”

No matter the goal – retirement, down payment on a house, paying off debt – Daprile advises customers to put those priorities at the top of the expenses list and make sound financial decisions based on one’s income.

“I encourage people to think critically,” he says. “Be honest with yourself. Write it down. Look at it. Think about it. And attack the situation.”

Copyright 2022 The Business Journal, Youngstown, Ohio.