What are You Waiting for, Generation Y? Save!

While in some respects, famed Hollywood director Oliver Stone is a complete, raving idiot, in others he makes surprisingly cogent statements. In Wall Street 2, Stone’s script has former financial shark, CEO, and prisoner, Gordon Gekko, talking to a Generation Y crowd gathered to hear him promote his new book.

He tells them, “You are the ninja generation. No income. No job. No assets.” He might also have added, “Too much debt.” The fictional but all too real point being made is that an entire generation will have arrived, lived, and disappeared without anyone knowing they were ever here.

Admittedly, we made that last paragraph especially brutal for effect, but there is a kernel of truth contained within. According to a recent survey released by TD Ameritrade Holding Corporation, more than half of Gen Y respondents said they plan to retire on schedule, a life view bordering on delusion considering the same survey revealed 48 percent are no longer saving at all, 33 percent have stopped saving for retirement, and 27 percent have a heaping pile of credit card debt.

And with this simple survey, Generation Y has revealed itself to be the poster child for the existing schism between perception and reality. Here’s the cold, hard truth. If you don’t make a conscious effort to create savings, you will never have any. Not now and certainly not at retirement when you really need it.

Subjectively, it appears that these Baby Boomer children and succeeding generations have become obsessed with mindless spending binges that blow up personal budgets and don’t create happiness. Saving doesn’t mean you must immediately adopt a monk-like ascetic existence, but it does mean you need a plan.

The Miracle of Compound Growth
New graduates should especially be aware of the power of compound growth. Let’s say you begin saving/investing a paltry $100 monthly at age 21 and continue that habit for two decades. By the time you are 41, your total investment not counting interest is $24,000. By the time our fictional graduate retires at age 67, even assuming he doesn’t invest another penny after the first 20 years, the nest egg will have grown to $471,358, assuming a modest 8% annual return.

And what if you continued investing that $100 monthly all the way up until you retired? Or were able to save $200 monthly? Or $300? It’s not too much of stretch to think that you could retire a millionaire.

Find Tax Advantages
While we all love to complain about the usurious United States tax code, there are a few powerful ways the government allows the citizenry to sidestep. Consider these options:

1. Employer-sponsored 401(k) plans – Money is deducted from your paycheck BEFORE taxes, and many employees will match your contribution. Any time you can invest money that has not yet been taxed, do it! Yes, taxes must be paid when you withdraw but, in the meantime, your money has decades to grow unfettered by Uncle Sam’s touch.

2. Solo 401(k) – The reality of today’s job market is that the number of companies offering retirement plans with matched contributions grows ever smaller. Gen Y workers tend to be job hoppers out of necessity, if they can find work at all. A relatively new retirement plan allowed by the IRS is called the Solo 401(k), which was devised for business owners and the self-employed. The bottom line is that you can reap the tax benefits of traditional IRA accounts AND control your own investments to a much greater extent than ever before. We can’t hope to educate you completely on this new type of IRA in this article, but you should check it out.

3. Health Savings Account – Is there anything more chaotic in America right now than medical costs? The easy answer is, “No.” You should consider opening a health savings account which, like an IRA, allows you to pay for certain expenses like doctor’s visit copay or prescriptions with pre-taxed money. Once again, tax-exempt or deferred money is manna from heaven. Grab it when you can.

The final bit of advice we would like to offer Generation Y is this. No matter how much you try not to think about it, retirement will catch up to you eventually. Whether or not you’ll be ready for it depends largely on the financial planning and follow-through you do right now, while you’re young.

This is critical stuff. There’s a very good chance that neither mom and dad or Social Security will be around to bail you out should you choose unwisely.

The Young Wealth Team

 

 

 

 

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