Feb. 13, 2017
By Gail MarksJarvis
If you're in your 20s or 30s there's a strong chance that you are getting puny paychecks that never seem to stretch far enough, and you may look at everything your baby boomer parents have and wonder if you'll ever catch up.
But that doesn't mean you're going to feel poor forever.
As a generation, millennials are earning 20 percent less than baby boomers were making in their late 20s and early 30s, according to a recent analysis of federal data by Young Invincibles. And today's 25 to 34-year-olds have only half the wealth that baby boomers had at the same age. In other words, today's young adults have less savings, fewer homes, cars, businesses and other assets, plus much more student loan debt.
But millennials can build their wealth, even though they may be starting with less, if they are intentional about handling money. With less pay, and the likelihood that it won't escalate the way baby boomers' did over time, today's young adults don't have the cushion to be sloppy about money decisions.
Many baby boomers weren't great savers. About 43 percent are not going to have enough money for retirement, according to the Center for Retirement Research. But millennials--since they are coming from behind--will be especially vulnerable if they don't start saving for the future in their first jobs.
Despite the wealth baby boomers have accumulated as a generation, too many missed the golden opportunity people have in their 20s. Boomers would be on their way to having $1 million for retirement if they'd simply put $25 a week into a stock market index fund in their 401(k) at work or an IRA retirement savings account starting with their first job, and kept it up.
Yet, most millennials don't realize that if they wait until their 30s or 40s to begin saving, they'll have much less in retirement. A person who skips saving $25 a week on the first job, and waits until 35 to start, will need to save more than $100 a week to end up with $1 million. That assumes a stock market index mutual fund investment averaging 10 percent a year. Notice $1 million isn't as huge as you might think. In retirement it will provide just $40,000 a year to cover living expenses.
Jaclyn McClellan, 25, and a financial analyst for the American Association of Individual Investors, worries about her millennial peers. They don't think they can save because they have student loans, and they "say their paperwork for 401(k)s is too confusing," she said. "But that's not an excuse."
"Say you are 23 years old and make $50,000 a year," she says. "If you save 10 percent of your salary that year in a retirement account, you will be saving $5,000. And by the time you retire in 42 years, that $5,000 will become $85,721 if your money grows at 7 percent annually, which is not unreasonable to expect in a total stock market index fund. That $85,721 isn't fake. You wouldn't have it if you didn't save at 23."
Financial planners urge millennials to save 10 percent a year for retirement, starting with their first job. "If you do it automatically and never see it, you don't miss it," said McClellan. Yet, if you are terrified about 10 percent, start smaller but don't miss a penny of the free money your employer will give you if you put money into a 401(k) at work. Often if you put 3 percent of your pay in the retirement plan, your employer will match it. In total, you will be saving 6 percent of pay. Then write yourself a note on the calendar to re-evaluate in six months. If you are paying your bills and having some fun, go to your 401(k) website or benefits office and start contributing 4 percent of pay. Keep upping the percentage every few months, especially as you get raises.
Remember, saving is a requirement; just like paying rent or utilities. When you save only what's left over those leftovers never appear, even if your income is high. Baby boomers made the error of waiting for leftovers.
Confused about where to invest your savings? Choose one of the retirement funds set up specifically for someone retiring around the same time you plan to retire, or ask for what's known as a "balanced fund." If you don't have a 401(k), go to a low-cost mutual fund company like Vanguard, Fidelity or T. Rowe Price, open an IRA and route money from every paycheck there.
Although some millennials have caught on to the way car payments, insurance, gasoline, licenses and repairs and tires can drain away paychecks, others make the mistake of paying too much for cars and leaving themselves no money each month to save.
You may need a car for transportation, but cut back on the dream car if payments will consume so much of your pay that you can't cover housing costs, food, insurance, clothes, utilities, other necessities and routine saving.
And make sure you consider the total cost of your car--monthly payments on the loan, plus the extras like car insurance and gas. As a rule of thumb, keep monthly car-related costs to no more than 10 percent of your monthly gross income. This calculator will help you envision the entire package of costs www.edmunds.com/tco.html and this will give you an idea about what you can afford www.edmunds.com/calculators/.
Don't extend the length of your loan so you can make monthly payments affordable. Keep the loan to five years so you aren't stuck making payments when the car is old, needs costly repairs, and it's time to buy a new one.
Renting or buying a house
After the housing crash and Great Recession of 2008, millennials are skeptical of buying homes as an investment. They realize, correctly, that homes do not always increase in value, although over many years they have appreciated slightly _ a little over a third of a percentage point--over the rate of inflation, according to economist Robert Shiller.
But whether a person buys a home or rents a home, keeping monthly payments on a 30-year fixed rate mortgage within a manageable level is crucial. The rule of thumb is to spend no more than 28 percent of your monthly gross income each month. This calculator will help: http://money.usnews.com/money/personal-finance/articles/2012/03/29/are-you-in-over-your-head.
Living within the 28 percent limit is especially important if renting because you won't be building up any equity the way you may if you buy a home. To decide whether to buy or rent, try this calculator: www.calcxml.com/calculators/rent-vs-buy-home.
The middle-class, in case we didn’t already know, is in trouble. But it is suffering particularly when it comes to retirement saving, which it Just. Isn’t. Doing.
The fifth annual Wells Fargo Retirement Study found that 34 percent of middle-class Americans aren’t putting money away at all — whether it’s for a 401(k), an IRA or some other retirement vehicle.
Among those ages 50-59, the number is worse: 41 percent aren’t saving for retirement. Almost a third (31 percent) say they won’t have enough money to “survive” in retirement, and when it comes to folks in their 50s that percentage rises to nearly half (48 percent).
Depressed yet? Wait. If you thought saving for retirement was a challenge, you’re far from alone, with 68 percent of respondents saying that it’s “harder than I anticipated.”
Forget pensions, retirees better off with 401(k)s, ICI says:
In 2013, one-third of retirees received some retirement income from plan-sponsored assets, either their own or a spouse’s. More than half (55 percent) say they’re going to save “later” to “make up for not saving now.” Among those in the prime age range for saving, 30-49, 59 percent are banking on that procrastination plan, while 27 percent just aren’t contributing to a retirement plan or account.
The irony is that not only do 72 percent say they should have started saving earlier for retirement (that’s up from 65 percent in 2013), 61 percent admit that they’re not sacrificing “a lot” to save for retirement (Thirty-eight percent say they are). And when asked if they would cut expenses “tomorrow” to save for
retirement, only half said they would.
Where would they find the money to save? Fifty-five percent said it would come out of spending for spa treatments, jewelry and impulse purchases; 55 percent said they’d stop eating at restaurants “as often”; and 51 percent said it would have to come out of funds planned for a car, a home renovation or a computer. Only 38 percent said they’d forego a vacation to save for retirement.
When they do save, they’re not saving all that much. The survey indicates that the median amount saved is $20,000 — down from $25,000 in 2013. Middle-class Americans expect to need a median of $250,000 in retirement, but are only saving a median of $125 monthly. If you discount younger middle-class individuals with lower-paying jobs and consider those between the ages of 30-49, savings are a bit higher at a median of $200 a month. But when you look at people in their 50s, that amount drops to only $78.
Not surprisingly, those with financial plans (only 28 percent) save more; a median of $250 per month. Also, people with 401(k)s save more, and 85 percent of those with a plan say they “wouldn’t have saved as much for retirement” without it.
Among those who don’t think they’ll have enough money, it’s a truly grim picture. Nearly half (48 percent) say they aren’t confident they will have put away enough “to live the lifestyle they want” in retirement, and that number increases to 71 percent for those in their 50s. Scarier still, a quarter of all middle-class Americans say they “get depressed” thinking about how their finances will be in retirement.
Bump that up to the folks in their 40s and 50s and you get one out of every three down in the dumps about it. And they’re serious: 22 percent said they’d rather “die early” than not have enough money for comfortable retirement living. A third say they will have to work until they’re “at least 80” because they won’t have enough money otherwise. Half of folks in their 50s say they’ll be working until at least 80.
OCT 24, 2014 | BY MARLENE Y. SATTER
Tom Hegna inspires me. If you are unfamiliar, Hegna is an author and speaker, and coach of financial planners. I commonly refer my clients to his book Paychecks and Playchecks, or one of his DVDs. His ideas are not particularly controversial or even uncommon, but his ability to articulate the fundamentals of financial planning is what separates him from the pack. Here’s a recent taste of Hegna doing what he does best—setting Financial Advisors straight about how to best serve their clients (he is speaking to financial professionals, but no “insider” knowledge is required to get the gist):
Beware of TINA: The Singing Siren
I want to direct your attention to our current economic status. When the market is having a bad day, I always like to post a quick snapshot to Facebook of the market's downturn. Despite major economic events in 2016 (Brexit, Fed Rates, underwhelming job reports, etc.), the Dow is at an all-time high. During 2016, according to the American Association of Individual Investors, the average portfolio of an active market participant engaged 64% of their portfolio into the stock market, which was an increase from the long-term average allocation of 60%. Back in 2008 when the market took a downturn, a lot of people got the heck out of the stock market and fast. After we saw some balancing and a bounce-back from 2009-2014 and even now in 2016 where the DOW is at all-time highs, a lot of those people are reentering the market.....STOP RIGHT THERE.
Economics 101: Buy Low, Sell High
Consumers Logic/Perception: 2008:The market is big, bad, and scary, get out! 2016: The market is making other people money, let's get the getting while the getting is good!
How does that make any sense? Why is the stock market at all-time highs in 2016? Inflation must be at an all-time high (Hint: It's not). Why are people trying to re-enter the market when it's at all-time highs?
One person comes to mind immediately: TINA, and I'm not talking about Tina Turner. There Is No Alternative (TINA). It is a scary thought that during a time when earnings are down, the economy is slowing, and oil prices have plummeted that people are piling more money into the market. What goes up, must come down. If the stock market is at all-time highs, it means there really isn't another option for stock brokers who want to keep their clients. They are forced to chase after gains for their clients and prove they are doing something for their fees. Many people are chasing after the gains we witnessed in the 1980s and 1990s because TINA. Bond rates are so low that they don't seem like a viable alternative. And if interest rates do rise, bonds will get crushed. CD's and money market funds are paying close to zero. What is an investor to do? Just like the sirens who's singing lured sailors to crash against the rocks, TINA may be doing the same to investors...When I think of all the Americans educated with this fallacy of TINA, I want to tell them, THERE IS ANOTHER ALTERNATIVE FOR EVERYONE!
For people in their accumulation phase, they should put at least a portion of their savings into a whole life or permanent life policy. For people in the distribution phase, I recommend converting a significant portion of their savings into guaranteed lifetime income. While people are riding the emotional roller coaster that is the stock market, you and your clients will be more optimally situated to enjoy life! If the markets continue to grow from TINA, with apprehensive and skeptical growth, stocks are likely to enter a bubble. With life insurance and annuities, there is no bubble! While your neighbors are stressed waiting for the market to open, you will be starting your second round of 18 holes and then heading to happy hour!
Look, the aging demographic in the US is not a joke. The US is getting older and older, which will have a dramatic effect on Americans lifestyles, social interactions, and market opportunities. Also, it will have an unprecedented impact on cross-generational interaction, future medical technologies, and economic influences. Rather than trying to predict the future of the market, stick with guarantees.