My parents are great people. They have taught me so much in life about resilience, kindness, compassion, creativity, hard work... the list could go on. But the one thing I didn’t really get taught? Saving.
Well, that’s not quite accurate. I was raised to have a savings account and to put money into it every paycheck. But the concept of saving for retirement, or that 10% is the right amount of money to save? Not things I knew about until I was out of college.
Because here’s the thing – teaching kids and teens about properly saving and budgeting their money for their future is critical. And no one is teaching them how to do it. Unless they are money-minded or receive that education at home, there is no one at school or university telling them what to do. Chances are, they’ll grow up to be young adults who, when presented with the ability to save into a retirement account for the first time, will agree to the auto-enroll savings rate and never touch it again.
So what are the kinds of conversations we need to have with young adults as they head out into the workforce?
- Saving 10%. If they save 10% of their paycheck into their retirement account and have a company match, that young adult is looking at having at least $1 million set aside for retirement, if not much, much more. This is because 10% allows them to fully maximize their match dollars. For example, if the company’s match is 4% and they were saving 10% each time, they would actually be getting 14% saved into that account each paycheck (hello, money!).
- High-Yield Savings Accounts. Setting aside money each month into a high-yield savings account for emergencies is a great way to make sure that accidents are taken care of, while also ensuring that money is growing. Aptus recommends having at least $1,000 in the account, but the goal is to have 3-6 months of expenses. If a teenager can start this account when they get their first job, they protect themselves against the all-popular trap: credit card spending.
- Credit Card Education. At the bare minimum, teens need to know what kinds of credit cards exist, what interest rates mean, and what the dangers of using a credit card are. Ideally, they will not use credit cards at all, but if they need to, then find a Student Credit Card offered by your local bank or credit union. These cards typically have extremely low ($500) limits with low interest rates. It can help your teen build a credit score WITHOUT maxing out debt.
- Retirement Education. To me, this is perhaps the most important of all the conversations to be having with your young adult – what does retirement mean for your future, and how can you protect yourself if your chosen career path doesn’t have easy options for you?
- Teens need to know that one of the great things about being a part of the workforce is that most companies out there have a retirement account and a matching system. These are accounts that get invested in the stock market and earn you money as you continue to save through the power of compound interest. Make sure they know what vesting means and how to pay attention to what their match schedule is.
- But, they also need to know how to generate a similar kind of wealth for themselves if they are not heading into an industry that easily provides them with these options (trades, creative fields, manual work, etc. – all important jobs that are often lacking these necessary tools). Help to unburden financial stress about the future by counseling them on the ways they can get a head start from the beginning.
- Some options that exist outside of a work retirement plan:
- Traditional IRA - you can contribute pre- or after-tax dollars, your money can grow tax-deferred, and after age 59½, withdrawals of after-tax contributions and any growth are taxed as ordinary income. This account has a $7,000 annual limit.
- Roth IRA - you can contribute after-tax dollars, your money can grow tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. This account also has a $7,000 annual limit.
- High-Yield Savings Accounts – you can find one that has a 3-4.5% interest rate. While this may not have the security of IRA accounts, there is no limit to what you can put into a savings account.
Here’s another truth – my dad is 76 and still working. He is a sports car mechanic with over 40 years of experience. He does incredible things, like rebuilding Porsche 9/11s from scratch and fixing the engines of cars that compete at Pebble Beach. And he worked really, really hard to make sure that his family had enough to live on. But even though he's slowing down, he can’t stop working. Why? Because he has no retirement accounts.
My dad, like many others in the trades, was subject to the fact that retirement accounts weren't an option he was given as part of his compensation. In fact, 50% of employers do not offer a retirement plan for their employees, but you are 12x more likely to save into a retirement account if you have one. Had my dad learned some of this when he was my age, I know his circumstances would be different now.
I love my dad, but I don’t want to follow in his footsteps, and I know he doesn’t want me to either. I’m grateful that I got the message to save 10% and to look for alternate retirement options if necessary while I was still in my twenties. Who knows how much I lost out on if I had known this at 18? 16? 14?
Let’s start having these conversations now.