Young savers falling short
Cox News Service
June 5, 2005
ATLANTA —The School of Hard Knocks is a wonderful thing, especially if somebody else is getting the knocks.
Freshmen at good old SHK always have the opportunity to watch what the juniors and the seniors are doing wrong — and to learn from their mistakes.
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One finding: In 2004, 54 percent of workers under 30 did not invest a cent of their salaries in 401(k) retirement savings plans.
"They believe that since retirement is so far off, they have plenty of time to save," said Lori Lucas, director of participant research for Hewitt. "They don't realize what they're giving up by losing out on all those years of compounding."
Some of their elders aren't doing much better. About 28 percent of workers in their 40s and 50s are not contributing to 401(k) plans.
The amounts saved aren't very impressive, either. The median balance of all accounts came to $24,640. "That's sobering," said Lucas, noting that the average participant is 43 years old, makes $58,000 a year and has been on the job for 11 years. "That is clearly not enough progress toward retirement," she said.
The 401(k) plans get so much attention in part because of tax breaks and matching contributions provided by many employers.
Even more important is the fact that fewer companies provide traditional pensions these days. The other traditional source of retirement income, Social Security, seems like a shaky prospect to many.
Saving for retirement used to be do-it-yourself. Now, for many, it's do-it-or-else.
The Hewitt study spotlights a number of unfortunate behavior patterns.
But even when you get up among middle-class workers — salaries from $40,000 to $60,000 — 21 percent put nothing at all away during 2004.
The biggest challenge is just getting started, says certified financial planner Mark DiGiovanni, proprietor of Marathon Financial Services in Snellville.
"Once people start taking deductions, they'll probably keep it up," he said. "First, they'll realize they don't miss the money. Second, they'll see that it starts building up, especially with the company match. Then they'll see the effect of the tax break."
That break is that income taxes are deferred on salary that you contribute to a 401(k). You don't owe any taxes until years from now, when you start drawing money out of your account. In the meantime, your untaxed investments grow faster than they would in a taxable account.
Financial planners suggest that low-level contributors commit themselves to gradual increases in their contribution levels, perhaps 1 percentage point a year.
Planners also suggest contributing part of every pay increase to long-term savings. Since 401(k) contributions are made by payroll deductions, this step is not just easy, it's automatic.
But last year 22 percent of workers didn't put in enough to get all of the match they were entitled to. Hewitt believes that some decided they couldn't afford the full contribution, some procrastinated, and a majority just didn't know about the match.
Workers should find out about matching and take full advantage, said Jan Dahlin Geiger, a certified financial planner with Financial Network Corp.
"Suppose you lay a dollar on the table and I say I'll lay 50 cents on top of it and you get to keep the money," she said. "It's as easy as that. If your company has a 50 percent match, that's what happens."
That's too much. "If the company starts having problems, you have to worry not only about your job but your investments as well," said DiGiovanni. "I generally advise that whenever you can sell large blocks of company stock, you need to do it."
Even well-publicized horrible examples like Enron haven't gotten the message through. "People say, 'There's nobody like that on this company's board,'Ê" said DiGiovanni. "My reply would be, 'When was the last time you attended a board meeting?'"
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