Starting your career can feel great — exhilarating and overwhelming all at once. But even as you focus on advancing in your field, it’s important to start thinking about retirement, and to keep that in mind if you switch jobs.
About one-third of workers in their 20s are cashing out their 401(k)s when they switch jobs. It might seem like a good idea at the time if retirement is four decades away or longer, but you’re undercutting your savings potential right out of the gate. Banner Clark of SBF affiliate Sagace Wealth Management, has two words for younger employees to remember: compounding interest.
“Simply put, it’s your money making more money over a long period of time,” he says. “That’s why investing in a retirement account is one of the most powerful things you can to do to build wealth for retirement.”
When you’re in your 20s or 30s and thinking more about things like student loans, mortgages and childcare costs, it may seem pointless to give yourself even less of your own paycheck. And if you’re nervous about the stock market and the economy overall, the effort might seem like a waste of time and money. Nothing could be farther from the truth, however.
“There are not many pros to cashing out retirement accounts early,” says Clark. You’ll contend with penalty payments, loss of equity growth and paying taxes, all while missing opportunities for, in essence, free money.
For example, if your employer offers a 401(k) matching program, take advantage of it. “If your employer offers a 3 percent match, then you should contribute a minimum of 3 percent to your 401(k),” Clark points out. “Now you’re putting away 6 percent of your salary when only 3 percent is coming from your personal paycheck.”
Young people’s anxieties are understandable, however. Here are some of Clark’s best tips to set your mind at ease about planning for the future, even far ahead to retirement.
Rainy day funds: “One of the first steps of financial planning is to create a rainy-day fund, with three to six months of expenses. That means if you face an unexpected expense or job loss, you’ll have a cushion that floats you until you re-stabilize. Building up a rainy-day fund should come before maxing out contributions to retirement accounts.”
Playing the long game: “The stock market has never not come back. Since the 1950s, the S&P 500 has, on average, gone up around 10 percent each year. While that doesn’t mean the stock market won’t go up and down, it does mean you’ll have plenty of opportunities to buy low and sell high.”
Automate your savings: “If you’re unsure about what you should invest in, many employee-sponsored retirement plans offer what are called target date funds. The premise is that you can calculate the year you hope to retire, and the fund’s investments will get more conservative the closer you are to that date. This is a great option for someone who wants to set it and forget it. They’re often more expensive, but they do have a diversified investment approach, professionally managed by mutual fund companies.”
There are some other paths younger investors can take for their retirement, including discussing the possibility of a Roth IRA conversion with their wealth manager or human resources pro. But no matter what path you take, getting in the game early is the best and simplest possible path to a secure retirement.
“Assuming a 7 percent return every year, $100,000 invested today would be worth around $387,000 in 20 years,” Clark says. “Most banks and money markets today don’t even pay more than 1 percent, but if we assume a 2 percent return every year, your $100,000 today would only be worth around $148,000 in a savings account. That’s a $239,000 difference.”
Visit the website at sagacewealth.com for more information or to schedule an appointment to discuss your financial future.