Monday, June 23, 2014

$ for graduates


President, Personal Investing at Fidelity Investments

If I Were 22: Get a Financial Head Start

This post is part of a series in which Influencers share lessons from their youth. Read all the stories here.
I was walking in Boston the other day on the eve of graduation for many of the colleges in town. The sidewalks were crowded with parents and grads, and I couldn’t help but take in the scene. Ahh, to be 22 again – a new grad, bursting with ambition and ready to take on the world. Such an empowering time in life.
Then I couldn’t help but wonder if these grads fully appreciate what comes next. Because with empowerment comes independence. With independence comes obligations. With obligations comes responsibility. And, if I were 22 again, I’d try to take this part much more seriously. While I so enjoyed living in the moment, I know now how fast time flies and how important it is to plan for the many moments ahead. And, since this is coming from me, you know I’m talking about financial planning…and saving for the day of ultimate independence because you have saved enough to afford your dreams, whether that be retirement, a second career, volunteer work or a magical trip around the world.
Here’s what I mean…
I know when you’re just starting your career it’s hard to comprehend what you’ll be doing some 40 years from now. But, if you take a few minutes today to fast forward to the future, look what can happen.
  • Let’s say you’re 26 and you’re diligently saving $100 a month in a retirement account, an IRA or your workplace 401(k). Smart move.
  • Now, let’s say you skip ONE restaurant lunch a month, and reallocate that money – call it $33 – to your retirement.
  • You missed out on a good meal so be sure that $33 is working hard for you. Let’s assume you took advantage of some financial guidance and directed that $33 into a growth-oriented portfolio of investments. Now, you’re looking even smarter…and better prepared for retirement.
  • Time to fast forward. You’re 67. That $33 “one meal” of savings over the years results in $330 a month in retirement income. That’s almost $4,000 a year, and more than $99,000 over 25 years in retirement.[i]
Imagine the compounding effect that can have on your life if you simply resist the temptation to buy a new shirt or skip one lunch out per month?
When you’re in your early twenties, you’re just beginning your “prime savings years” – that magical period in your life when a dollar saved can potentially multiply into eight or nine in an IRA or workplace plan. Time is one of the greatest financial opportunities available – a gift really – to new grads. Those who start saving now are giving themselves a tremendous financial head-start.
Another “must” for those just starting out, talk to someone you trust – maybe one of your parents – who has been there before and can offer some good fundamental guidance about saving and investing.
When I was in law school, I interned at a large local company. After graduating, I accepted a full-time position at the company, but before doing so I took the advice of a mentor and arranged to have my pension dated to the start of my internship and not my first day of full-time employment. This was not a big negotiation. I simply asked for it and received it. But today that pension is worth a lot more because of those extra years and the terrific advice I received.
I can’t tell you how many times someone tells me the best advice they ever received came when they started their first job and someone advised them to “max out their 401(k),” i.e. take full advantage of the retirement benefits that the company or organization offers. The matching contribution is like getting “free money” … with the potential benefit of tax-deferred growth down the road. I couldn’t agree more – excellent advice!
Today, with young people facing new savings challenges – an increasing retirement age, the continuing elimination of corporate pension plans, and looming questions about social security – it’s more important than ever to start saving early. There’s a real good chance you’ll live longer in retirement than your parents. Imagine making your hard-earned money last to 97 or 100 years old? That’s a real possibility.
If I were 22 again, I’d begin charting my savings goals now and stash away more. So tell me,what steps are you going to take to kick off your savings journey and position yourself to live the life you always dreamed of?
Photo: Robert Churchill/Thinkstock
[i] Hypothetical example assumes that the individual saves until retirement age 67, lives through age 93, and receives a 1.5% real (inflation-adjusted) increase in wages per year. Rate of return is nominal 7.0% and consists of 4.7% real return and 2.3% inflation. This illustration assumes that deferral percentage rates stay constant throughout the participants’ working careers. Estimated increases in retirement monthly income are in constant 2013 dollars. It is assumed that upon retirement the real (inflation-adjusted) dollar amount is withdrawn annually through age 93, and that the participant took no loans or hardship withdrawals from his or her workplace plan. The maximum annual qualified 401(k) retirement plan employee contribution limit in 2013 is $17,500 (or $23,000 if age is 50 or older). All dollars shown (including increases to monthly retirement paycheck) are pretax dollars. Upon distribution, applicable federal, state, and local taxes are due. No federal, state, or local taxes; inflation; or account fees or expenses were considered. If they were, returns and monthly increases would be lower.
Additionally, $33 per month starting at age 26, which would increase along with assumed real wage increases of 1.5% annually for an average contribution of $46 monthly over the participant’s working life to age 67. $50 per month starting at age 36, which would increase along with assumed real wage increases of 1.5% annually, for an average of $64 monthly over the participant’s working life to age 67.
Views expressed are as of May 27, 2014. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments.
Past performance is no guarantee of future results.
Investing involves risk, including the risk of loss.

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