Recent college graduates and those new to the workforce often don’t take advantage of their employer-sponsored retirement plans. While younger workers are usually less focused on saving for retirement because they think they have enough time to address it in the future, wage stagnation, high unemployment, inflation, and overwhelming student loan debt impact millennials and Gen Z workers more than previous generations.
Vanguard research shows that job switching — a phenomenon popular with younger workers — can increase worker income by up to 10% but decrease retirement savings rate by 1%. Long-term compounded interest is the key to 401(k)s and IRAs reaching full maturity.
The sooner younger Americans start consistently contributing to retirement plans, the more financially stable they’ll be as they approach retirement.
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Bob Powell, CFP and editor of Retirement Daily, shares some tips on how younger workers can maximize their retirement plans and take control of their asset allocation.
He highlights the importance of Target Date Funds (TDF) and how they match the risk appetite of each era of a worker’s life.
Target Date Funds are great for new investors
Powell underscores the importance of having a healthy mix of assets, taking risks when you’re younger, and having a conservative allocation as you age.
“For many people, the answer is investing in a Target Date Fund because it gives you an asset allocation — a mix of stocks and bonds — appropriate for your age,” he said. Assuming that you will retire in 45 or 50 years, that target date fund will adjust its asset allocation to become less aggressive and more conservative as you approach your target retirement date.”
TDFs take the guesswork out of choosing the right investments for new investors, which Powell notes makes them a great fit for younger workers.
“It's sort of a plug-and-play type of mutual fund, where you don't have to worry about rebalancing or how it's invested,” he explained. “And so for many young people, this is an easy way to get started, especially if they don't have any experience with investing.”
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However, those who are experienced with investing may be able to take control of their financial planning and choose their own portfolio.
“For people with some experience, you might want to choose a different route,” Powell continued. “Maybe you'll choose to invest 90% of your money in the S&P 500 index or, you know, some of it in the NASDAQ 100 and a small portion in fixed income to give you some asset allocation and diversity.”
“Those are the two best ways to go: if you're inexperienced, choose a target date fund, and if you have some experience, choose an index fund and manage it as appropriately as you see fit.”
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Actively monitoring your portfolio is just as important as saving
Powell highlights that just contributing money towards a plan every month isn’t enough; you need to be a conspicuous investor and keep track of your portfolio performance if you want to reach your goals.
“If you're in a 401(k), the provider will likely send you lots of educational material. They're likely to offer you tools and calculators to use. Take advantage of those resources,” he said.
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“The last thing you want to do is not pay attention to your retirement account,” he continued. “Don't discard the envelope if it's coming in the mail to you. Don't just delete the email that’s telling you what your account balance is. Do a check-in with your money.”
Powell also notes that your retirement account balances will be the baseline of your retirement income, so understanding its fluctuations is crucial to a successful retirement.
“This is ultimately what's going to create your paycheck in retirement when you no longer have a W-2 or a 1099 coming in,” he explained. “So, pay attention to your money. Don't just set it and forget it — become an educated investor.”
“I think that will go a long way toward helping you, you know, make sure that you save enough for retirement. Ultimately, that's the goal. You want to save enough to fund a desired standard of living for decades of free time in retirement.”
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