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nevergiveup

Young adults and 401Ks

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Say you have a young adult in your household, age 26, working full time.  Is there any way to advise them as to how much money they need to have in their retirement account by the time they retire in order to live comfortably?

I know there are a lot of variables, but is there some general guideline since retirement is such a distant concept for them?

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There are a whole bunch of calculators online. I wouldn’t necessarily tell a 26yo how much they need, but I might point out the difference between the outcome of, say $200/mo vs. $800 over 40-something years. (Or whatever numbers are better applied to their specific income.). 

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The multiplier effect is so huge for *anything* socked away that early that there's a good argument for As Much As You Can now... particularly if the young adult is not yet supporting children.  That doesn't give a number, so much as a principle.

We do a sort of in-family matching grant program, so whatever my 24 yo puts aside herself, we match.  I figure subsidizing her habits of *saving* are a better investment in her than giving her expensive gifts.  

 

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If employer offers any kind of match I would show the numbers for how much money is left on the table if that isn’t taken advantage of. Between losing tax advantages and an employer match, there is money left out there even before interest.

There are lots of online calculators you can fool with different scenarios and see the outcome.

 

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If they have an employer match absolutely at least that much.

Depending on their tax rate, I would also highly encourage them to look at starting a ROTH IRA.  That maxes out at $6000/year now but will be totally tax free at retirement as they put in after tax money.

One HUGE thing to look at though is the fees and expense ratios (that you pay automatically to the financial company)  Those can eat up a great deal of your profits and adds up exponentially over time.  This is true with picking a 401K option (often limited to whatever choices the company offers but if they offer a match then it helps negate that) and a ROTH IRA.

I went with Vanguard as they had very low expense ratios and most of their account options had no fees.  Even if you go with another company they have a wealth of information on their website about different types of investments, how fees and expense ratios work, fund performances, etc.

 

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My dh encouraged our 18 yo to start a ROTH IRA now. She is in the lowest tax bracket possible, so this is the time to be putting money aside if you are able. 

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I agree with others that the answer is as much as they can as early as they can, not a dollar amount. I have found showing them numbers regarding how compounding works using the online calculators to be very motivating. We started maximum retirement saving at around 27, which is pretty good, but I showed them how much better off we’d be if we had started earlier, even with small amounts.

I’d talk with them about automatic withdrawal too, since it makes it less painful. If they just get in the habit of having that amount taken out and living on the rest, they won’t miss it.

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This was a long time ago, but I went to work for the Federal Government after college.  The TSP matched 5 percent and my parents told me to do at least the amount to get the match.  I had it taken out from my first paycheck so I never missed it, but it was a lot of money I didn't see that first year out of college -- LOL..  The next year, and for the following 14 years, I went to the max of 10% and still got the 5% match.  So worth it now!!!

 

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2 hours ago, Pam in CT said:

The multiplier effect is so huge for *anything* socked away that early that there's a good argument for As Much As You Can now... particularly if the young adult is not yet supporting children.  That doesn't give a number, so much as a principle.

We do a sort of in-family matching grant program, so whatever my 24 yo puts aside herself, we match.  I figure subsidizing her habits of *saving* are a better investment in her than giving her expensive gifts.  

 

 

I like that idea. 

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2 hours ago, Pam in CT said:

The multiplier effect is so huge for *anything* socked away that early that there's a good argument for As Much As You Can now... particularly if the young adult is not yet supporting children.  That doesn't give a number, so much as a principle.

We do a sort of in-family matching grant program, so whatever my 24 yo puts aside herself, we match.  I figure subsidizing her habits of *saving* are a better investment in her than giving her expensive gifts.  

 

 

Agreed. The only 401K I have is the money  I put away when I was a young adult.  Once we had kids it became harder to put anything away. But that early money is still there, still chugging along in the background.

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The way I motivated myself was by keeping an ongoing analysis of how close I was to being able to quit working if I wanted to, LOL.  Tentatively working toward a goal might make the discussion more concrete.

Of course bills / interest / tax considerations are taken into account.

When I was around that age, I did not participate in my company's 401K, because I didn't feel confident I would be at the company for the 5 years it took to vest.  I had mega high interest bills, so I prioritized paying those off.  Later I joined the 401K and contributed the max once I could afford to.  I don't regret not starting earlier.

I would also encourage my kids to be generous toward charities if they have enough money to save or spend.  People who are all about securing their own future never really feel secure.  Taking a little risk and sharing burdens is a better balance IMO.

Edited by SKL
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Thankfully, he is participating in his company's 401K and they do match to a certain extent.  I worry that he has no realistic idea of the cost of retiring--that he will look at the balance and, being still young, think that it is a lot of money when it really isn't.  So, I thought it might be a good idea to have an actual figure to shoot for so he can see that no, he won't be able to retire any time soon.

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We have our son saving the max matched by his employer. He is also saving additional money for an IRA. Also, bring up the tax credit for retirement savings contributions credit. This year, my son got 50% of what he saved back in his tax refund. He promptly put in in an IRA.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

Then, make sure the magic of compound interest is understood!

 

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24 minutes ago, nevergiveup said:

Thankfully, he is participating in his company's 401K and they do match to a certain extent.  I worry that he has no realistic idea of the cost of retiring--that he will look at the balance and, being still young, think that it is a lot of money when it really isn't.  So, I thought it might be a good idea to have an actual figure to shoot for so he can see that no, he won't be able to retire any time soon.

We can calculate based on today's reality, but things are going to be different when our kids retire.  Who knows whether they will need more or less?  I wouldn't want to make them fear doomsday based on things we don't even know right now.

Fact is, there will always be some people who don't save at all, and we aren't going to let them starve to death.

I always feel the advertised "need" for retirement cash is way overblown.

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As I recall, the general rule of thumb is 10-12x current income, if you want to live a little below current income and retire at 65, but that’s very general.

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4 hours ago, Pam in CT said:

The multiplier effect is so huge for *anything* socked away that early that there's a good argument for As Much As You Can now... particularly if the young adult is not yet supporting children.  That doesn't give a number, so much as a principle.

We do a sort of in-family matching grant program, so whatever my 24 yo puts aside herself, we match.  I figure subsidizing her habits of *saving* are a better investment in her than giving her expensive gifts.  

 

We told our kids we’d contribute 1k the first year they earned that much (and they didn’t have to contribute anything), and then every year after until they are fully launched we’d match what they put in up to “x” amount. They both opened their Roth IRAs at age 16 and have contributed every year since. Even that little bit starting so early makes a huge difference down the road.

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One guideline I saw was to plan on withdrawing 4% a year from your retirement accounts.  That would give him a basic guideline of how much a year he would have to take out of there.

 

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2 hours ago, nevergiveup said:

Thankfully, he is participating in his company's 401K and they do match to a certain extent.  I worry that he has no realistic idea of the cost of retiring--that he will look at the balance and, being still young, think that it is a lot of money when it really isn't.  So, I thought it might be a good idea to have an actual figure to shoot for so he can see that no, he won't be able to retire any time soon.

I would worry to much about his being realistic about the cost of retiring at this point--it is almost impossible to predict at this point--what will inflation be?  What will his health be?  What kind of lifestyle is he used to?  Does he own a home?

But, the fact is saving now is a good idea--he will be better off in retirement the more he saves now.  Also, he will have more flexibility later in life (not having to save as much for retirement and spend the money on kids' college instead, buy a house instead, etc.)  If thinking that he will be able to have enough to retire when he is 40 motivates him to save now, that is fine.  He may need to reassess when he is 40 and has a better idea of how much things cost.

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Our advice to not only our children, but to any young adult, would be to max out your IRA contributions each year before doing anything else with your discretionary money.

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5 hours ago, nevergiveup said:

  I worry that he has no realistic idea of the cost of retiring--that he will look at the balance and, being still young, think that it is a lot of money when it really isn't.  

My husband started by planning how much he would roughly need for a downpayment for a starter home while he was in college. It is easier than estimating for cost of retirement for a young adult. 

While we do save for retirement, now we are at the stage in life of estimating college costs for our kids to attend a financial and academic safety. 

I agree with the IRA contributions while young. By the time we knew about IRA contributions, our family income is above the cutoff for contributions (we relocated to the US in our 30s).

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If that were my child, I'd advise her to contribute enough to get the max. matching contribution and being totally debt-free.   Then focus on buying a reasonably priced house, then focusing on paying off that house.   The compounding that happens in the 401k also effects the mortgage and is guaranteed (unlike with a 401k).    Then after the house is paid for, then focusing on retirement money.   

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