April is Financial Literacy Month, prompting a flurry of articles on the retirement crisis in the U.S. One noted that the “average” retirement savings amount, paltry though it is, is often an overstated figure because it is the average (or mean) rather than the median and is therefore skewed by very high balances. This article indicated that although the “average American” has about $200,000 in retirement savings, that figure becomes $59,000 when we look at the median.
The crisis is even worse than advertised.
We, as a society, need a paradigm shift if we are going to solve the retirement crisis in the U.S. Children are not taught financial literacy in school, and yet we expect them to navigate the confusing world of investments as adults and save enough to fund their retirement. Parents are often the only ones to teach this life skill to their children; however, many parents struggle in this area themselves and set bad examples.
To prevent this crisis from continuing into the next generation, we must empower our children, starting at a young age, so that they grow up to become super savers. How can we motivate a 20-something, who is earning an entry-level wage in a high-cost-of-living region like the San Francisco Bay Area, to focus on saving for retirement when many have little extra cash to save, no experience with investing, more immediate financial goals, and nobody to guide them through the process?
In my work as a retirement plan consultant, I have the opportunity to meet with and educate young people who are just beginning their careers. With a goal to encourage them to participate in their 401(k) plans, I teach them what it means to be a “super saver” and how that opens up your options later in life.
A “super saver ” is one who saves a substantial percentage of his or her income, typically 20% or more. Super savers prioritize saving and investing over housing and day-to-day expenses. They are willing to make sacrifices in their current living standard because they are motivated by the goal of financial independence later. A survey conducted by The Harris Poll on behalf of TD Ameritrade examined the financial behaviors of these aggressive savers and found that more than half of all super savers started investing before age 30.
Super savers give themselves a lot of opportunities.
They can retire young if they wish, or they can take a mid-career break to enjoy more time with families before their children leave home. They have the luxury of making a mid-life career change and reducing their income in order to do so. They are in a position to do more philanthropically to support the causes that they are passionate about, and they can travel more while they are young and healthy enough to enjoy it. They have a robust safety net in case of unforeseen setbacks, such as extended unemployment or medical costs.
My message to these young workers is simply: the earlier you start saving, the easier it will be to achieve financial freedom. When you save enough, early enough (and you invest with a healthy rate of return), you give yourself enough time to let the power of compounding work its magic. Start later, and you will either have to save more each year or work more years. Make it your habit from the get-go to save for retirement so that it becomes second nature. This deliberate approach is the key to success – you can’t count on a stroke of good fortune to change your financial circumstances, but it is achievable with discipline.
Once a young woman came up to me after a presentation to say that she was ready to set herself on a different financial path. She described her childhood – her parents regularly hid from creditors, moved the family due to evictions, and declared bankruptcy. This young woman told me that she wanted a different life for herself – she wanted to be responsible about saving and investing and was ready to work towards her own financial freedom. I met with this woman regularly thereafter and watched as she transformed her life. She got out of her high-cost one-bedroom apartment and took on roommates, cutting her housing cost by more than half. She sold her car and converted to public transit. These lifestyle changes allowed her to pay off her student loans aggressively. Within two years of our initial conversation, she had paid off her debt and was aggressively saving into the 401(k) Plan. Now she is in her 30s and on track with her retirement savings. She has become a “super saver.”
How can you help groom the future super savers of America?
Whether you’re a parent who is preparing your children to launch into their independent lives or you are an employer or plan fiduciary who wants to empower workers to prepare for their future, you can start with teaching simple lessons such as:
- Start saving for retirement as soon as you enter the workforce and do not stop.
- Save a minimum of 15% of your pay, always.
- Set savings goals. A person who sets goals is more likely to attain those goals.
- Utilize debt to your advantage. There is good debt and bad debt, and it is important to understand the difference. Good debt can help you grow your wealth; bad debt erodes it.
- Understand that the stock market goes up and down. Do not fear the downturns. Expend far less energy on concerns about market fluctuation and far more energy on saving enough.
These lessons are just a start to overcoming the retirement crisis and motivating our young workers to save. What other lessons do you teach to help this next generation of super savers?
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