Naturally, affording retirement isn’t an issue that weighs heavily on the minds of young people just starting off in the workforce. So it’s no surprise that only 28% of workers under age 25 contribute to employer-sponsored retirement plans, as reported by tax info service CCH.
But as a parent, you don’t want your child to wind up behind. And with fewer employees getting offered corporate pension plans, individual savings are increasingly important in determining quality of life in retirement. As for convincing your child of this …
Demonstrate the cost of waiting
You know that time is a powerful factor in building wealth. But does your child? Demonstrate with numbers: A 25-year-old saving $250 a month prior to taxes — the equivalent of $188 right after taxes in the 25% bracket — will have $656,000 by age 65, assuming a 7% average annual return; if he instead waits until 35 to start saving, he requirements to stash more than $500 a month to obtain to the exact same quantity.
Use the calculators tools, to run a lot more scenarios. Share your personal experiences too. If you’ve been a disciplined saver, explain what it means for your retirement; if not, say what the consequences may be, says Atlanta monetary planner Mary Claire Allvine.
Clarify the incentives
Numerous young adults do not realize how much money they’re leaving on the table if their organization offers a cost savings match and they’re not contributing. Show your child: If he’s making $50,000, a match of 50ยข on the dollar up to 6% of salary is worth about $1,500 a year.
If your child argues that he won’t be at the job lengthy enough to vest, clarify the other benefits of employer retirement plans, for example pretax contributions and deferred growth. And if you are able to afford to, produce your personal match by contributing to an IRA on your child’s behalf contingent on his saving, says Hadley, Mass., monetary planner Allen Davis.
Play monetary adviser
Provide your wisdom in selecting investments, which could be intimidating to a beginner. Not confident in your personal knowledge? Recommend a target-date mutual fund, which adjusts the mix of stocks and bonds to grow more conservative as retirement nears. Or have your kid pick stock and bond index funds in an 80/20 mix, an allocation that won’t have to be changed for a decade or so.
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