Young Workers Not Saving Enough in Tax-Advantaged Plans
So what should young workers do?
Make sure you're aware of all your tax-related benefits. A simple way to do that is to visit your company's human resources department to learn whether you're eligible for a 401(k), FSA, or other tax-deferred savings vehicle. Also, visit the websites of major investment firms like Fidelity, Charles Schwab, or T. Rowe Price to see if you qualify for various types of individual retirement accounts.
If you're getting a tax refund this year, use the money to fund an IRA. It's tempting to spend tax refunds, especially since households often consider this "found money." But in reality, it's not found–you earned it throughout the year. So why not take your hard-earned tax refund and invest it for your future? Many financial services firms now make it extremely simple to open and fund an IRA. In fact, Schwab has created what it calls its "15-minute IRA," which you can open online in minutes.
Take full advantage of your company-sponsored 401(k). In this age of do-it-yourself retirement savings, 401(k) plans have become a worker's primary savings and investment vehicle. Yet the average generation Y worker (ages 18 to 25) has saved only around $3,200 in an account. The good news is, the government is gradually increasing the maximum amount that workers can contribute. This year, the federal limit for annual contributions to a 401(k) stands at $15,500, up from $15,000 last year.
Think about using a so-called target-date retirement fund in your 401(k). Many workers aren't contributing to a 401(k) because they haven't a clue how to invest money. But the majority of 401(k) plans now offer workers access to a so-called target-date fund. These are single-fund solutions that will make sure you're always invested in the proper mix of stocks and bonds. These ready-made investment packages aren't just easy to use–they're also quite effective. According to a recent study by Hewitt Associates, workers who utilize these investment options–instead of managing their own collection of mutual funds–end up earning bigger returns than do-it-yourselfers.
At the very least, take full advantage of any company matching contributions. Many companies give workers a match on their retirement savings. Often, for every $1 you put in, your employer will kick in 50 cents up to around 3 to 6 percent of your salary deferrals. That's an immediate 50 percent return on your investment, with no risk.
Use any annual raises to increase your contributions to your 401(k). It's not enough to simply participate in a 401(k). You have to save adequately inside it. According to the Schwab Center for Investment Research, workers in their 20s should be setting aside at least 10 percent to 15 percent of their paychecks for retirement savings. Yet the majority of young workers don't save anywhere near that amount. Among gen Y workers who are participating in a 401(k), the average savings rate is just 5.6 percent, according to Hewitt. A simple–and somewhat painless–solution is to increase your savings rate every time you get a raise. That way, you never have a chance to see the raise in your take-home pay. And if you never see the extra income, you probably won't miss it.
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