Each decade of adult life brings unique challenges and incentives when
it comes to saving and planning for retirement. In a series of exclusive
articles, the 401Kafé is examining strategies for successful retirement
investing from the 20s to the 70s and beyond.
Each month we'll look at a different age group. Up this month: the 30s.
Note: While in his 30s, the author has bought a sedan, a refrigerator, and a house, and gotten married. He and his wife are expecting their first child in June. With three years left until he hits 40, he is trying to avoid angst.
Remember that popular television program of the early '90s, "thirtysomething"?
It was an angst-filled look at one of those critical decades during which we truly start to identify ourselves as adults. We get married, buy houses, have kids and settle down. For the first time, we also start to seriously contemplate our own mortality.
But, it doesn't have to be as melodramatic as Hollywood portrays it. Getting through this decade means accepting life's growing responsibilities and that they can be dealt with through careful planning and discipline.
Let's take a look at the factors thirtysomethings face and how to manage them.
The Happy and Carefree Advantages of Being Thirtysomething
If you're in your 30s, it's hard to imagine that life is still your oyster when all you seem to hear about is all those twentysomethings getting rich spinning out new Internet companies.
Plenty of Time
If this news stresses you out, relax. There are things still working in your favor as you plan for your financial future. One is that you still have plenty of time to save for retirement.
Indeed, that's what 36-year-old Kevin Pendley thinks. He and his wife aggressively invest their 401(k) portfolio in growth stock funds. He's comfortable with his decision. "I like the position of the growth stocks," he said.
And if the market takes a tumble? "I know as a young person, I would have time to recover as I got older," he adds.
If you expect to retire at the standard age of 65, if you're in your 30s you still have about 30 years to go.
Say you put the maximum-allowed $2,000 a year in an IRA, each year, from the age of 30 until you reach 65. Assuming a 10% return on investment and no taxes, in 35 years your nest egg will grow to nearly $600,000.
If you can save even more, that balance will grow even faster. For instance, if your employer offers a 401(k) plan, you can save up to $10,500 a year.
You may need this time if there's an extended stock market decline. Most folks in their 30s can't imagine a bear market simply because they don't remember the last one. (It was in the early 1970s.) After a severe decline in 1973-74, it took seven years for a $100 investment at the February 1973 high to regain its original value. The current run likely won't go on forever.
|To find out what a bear market could do to your savings, click here.
The 30s are likely the time when you will see some of the greatest income growth in your working career.
"I see people in their mid-30s generally having jumps in their incomes because they mature in their careers."
|- Kay Shirley, certified financial planner and author of "Live Long and Profit"
"I see people in their mid-30s generally having jumps in their incomes because they mature in their careers," said Kay Shirley, a certified financial planner and author of "Live Long and Profit."
For folks 25 to 29 years old, the median family income was $35,636, according to a Census Bureau study in March 1999. But for folks 35 to 39, the median family income leapt 38% to $49,129.
That gives you more disposable income to divert toward savings.
Breaking Away From Peer Pressure, Accepting Reality
You're starting to break away from peer pressure. When you were in your 20s, life was often about doing the same things as your friends, going out to dinner, taking trips or buying a new car every two to three years. In your 30s, that starts to change. A new view of life develops.
Sonia Green, 31, and her husband Colby, 29, are finding that out. Four years ago, the couple thought it would be fun to go with friends to the Olympics in Atlanta. It was. Afterward, they made tentative plans to go to Sydney for the 2000 games.
The Greens shelved those plans six months ago. The reason? "We got us a kid," Colby Green said, referring to the birth of his son, Harrison.
One common view among thirtysomethings is that they're responsible for their financial security.
"Generation Xers … are savers. They are saving into their 401(k) programs."
|- Chris Cumming, vice president of marketing at Diversified Investment Advisors
"Generation Xers, (which include folks up to 35 years old) … are savers. They are saving into their 401(k) programs. … They, surprisingly enough, have proven to be a little more frugal than baby boomers," said Chris Cumming, vice president of marketing at Diversified Investment Advisors, an investment advisory firm.
When Shirley asks clients why they save, she often gets one of two answers: "Either 'my parents are doing great (in retirement) and they taught me,' or 'they are doing terribly and I don't want to be in that mode,'" she said.
The Challenges Of Being Thirtysomething: The Angst
More Demands For Your Money - Houses, Kids
While the 30s are when your salary starts shooting up, saving gets tougher because other aspects of life compete for your money.
That's exactly what Green and his wife are finding. The pair is trying to figure out how to save for retirement while paying off a $135,000 mortgage and $100,000 in student loans, combined with the cost of raising Harrison. The last may entail hefty school bills if they opt for private school -- it could cost between $7,000 and $12,000 a year. Plus, "I want to pay for a four-year (college) degree in whatever he wants," Green said.
According to the U.S. Census Bureau, home ownership rates continue to increase dramatically for people in their 30s compared to the 20s. In 1999, 33.5% of married-couple households with heads of household less than 25 years old, owned a house. Homeownership rises to 54.6% in families with heads of household between 25 and 29 years old. Between 30 and 34 years old the rate jumps to 70%. By the time we get to the 35-39-year-old range, homeownership rates hit 78.8%.
A major reason why these folks buy homes may be to accommodate growing families.
You're On Your Own To Build Retirement Savings
As a thirtysomething, the responsibility for preparing for retirement is almost exclusively yours. Don't count on your employer to offer a traditional pension plan, called a defined benefit plan. If you're lucky, you'll get a 401(k) plan with a nice company matching contribution.
"When you look at all the new start-up businesses, there are few defined benefits programs offered," Cumming said.
That means folks in their 30s don't have "an anchor to windward," he added.
In 1983, the total number of private defined benefits plans reached a high of 175,000. By 1997, that figure was expected to fall to 53,000, said the Employee Benefit Research Institute, in a 1997 study. In comparison, the number of private, defined-contribution plans was expected to hit 647,000 in 1997, up from 208,000, in 1983.
Further, the responsibility for generating adequate investment returns is also on you. Unlike pension plans, where employers decided how to invest money to generate adequate retirement income, in a 401(k) plan or other individually directed plans, you make the investment choices.
The Downside of Job Hopping
Job-hopping may satisfy immediate salary and spending needs while possibly cheating the future, financial planners say.
"This group of workers, in their 20s and 30s, will change jobs eight times," Cumming said.
Say you change jobs eight times over a 10-year period -- you got a new job every year and a quarter. Further suppose that you waited to save for retirement until you could participate in an employer-sponsored plan. Most employers have a one-year eligibility period, Shirley says. (One bright spot, eligibility periods are starting to shorten, Shirley adds.)
Let's assume that at each job you were able to contribute retirement savings for three months before moving to a new job. Given this scenario, it's possible you would have accumulated only two years of retirement savings.
Furthermore, by hopping jobs you probably missed out on getting employer-matching contributions, which typically are granted after several years of service.
How To Beat The Angst and Be Happy
Do Some Retirement Planning
Now's the time to do a little retirement planning. What do you imagine your retirement years being like? Will you continue to work? Travel? Take up a new hobby?
"The point is you will eventually reach (retirement) age and probably won't want to work as hard as you do now. If you … have done it right in your 30s, you will have freedom of choice," said Diane Savage, certified financial planner and retirement education consultant with Watson Wyatt Worldwide.
Start Saving and Keep A Long-Term Focus
When you save, you're paying yourself first.
"It's not how old you are when you begin to save, but when you plan to use the money."
|- Diane Savage, certified financial planner and retirement education consultant with Watson Wyatt Worldwide
It's never too late to start. "It's not how old you are when you begin to save, but when you plan to use the money," Savage said.
If you're in your 30s you can take advantage of 30 years of interest compounding to build a nice nest egg.
The tough part of saving that most of us grapple with is meeting the ambitious goals we set. We feel if we can't meet them, why try.
"I think the danger comes when people hear the retirement savings message as an all or nothing thing," Savage adds.
The point is to get started.
Paul Hrisko, a certified financial planner, constantly tries to nudge his clients to save more. If they set aside $100 a month, he asks how they could do another $100. "They say 'we don't have to go out to dinner every night,'" he said.
At year-end, when they see how their savings have grown, "then it kicks in. They are looking at other ways to reduce expenses," he adds.
You should save for retirement in a tax-deferred plan such as an employer-sponsored 401(k) plan or IRA, if you're doing it on your own. You may want to consider saving in a Roth IRA as well. The Roth has the advantage of providing non-taxable income at retirement if you meet the conditions.
One goal: Try to save 10% of your salary. Put it toward an emergency savings fund (equivalent to three to six months of salary), retirement saving and any other goals. Once your emergency fund is flush, you can concentrate on the other goals.
Once you get started, keep a long-term focus. Developing a personal budget might help.
Resist the urge to micromanage your retirement account, Shirley says. "If you want to play with something, do it with money not earmarked for retirement," she said.
Her best clients faithfully contribute to their accounts without noticing market direction.
With a long-term focus, you should be investing aggressively, said certified financial planner Donald Boegel. He recommends his clients invest 100% in stocks, to help them beat inflation as well as build a nest egg.
If you have a child, get started on college savings right now. Four years at a college that costs $19,213 a year in 2000 will cost a total of $263,056 for a student enrolling in 2018, assuming college costs increase at the rate of 6.5% a year, according to one calculator. You'll need to put away $4,041 a year -- $337 per month -- in today's dollars to cover the cost.
Pay Off Debt
Savage identifies debt as one of the biggest deterrents to saving.
"It is the enemy of saving. It makes the concept of getting ahead difficult to imagine," she said.
Yet in their 30s, folks may be still paying off student loans or credit cards.
That said, the one type of debt that folks in their 30s should consider incurring is a home mortgage, financial planners say. The mortgage interest is tax-deductible and by owning a house, you build equity.
Stick With Your Job - Get Your Vested Matching Money
"Don't job hop too much, because many times vesting schedules will come back to bite you."
|- Kay Shirley, certified financial planner and author
"Don't job hop too much, because many times vesting schedules will come back to bite you," Shirley said. "Many times you think (employer matches) aren't worth anything. Folks think you can come back and make that up later."
But, it's hard to make up the time that an employer matching contribution sits in a vesting account steadily building up compound interest.
Say the day you start a new job, you can immediately invest in the company 401(k) plan. You contribute $2,000 a year to the plan, and your employer offers a 50-cents-on-the-dollar match, or $1,000 a year. Suppose it takes four years for those contributions to vest. Again, let's assume a 10% rate of return. Over that four-year period you would contribute $8,000, and your employer $4,000, but your money would grow to $18,315.
If you left your employer after three years and 11 months, however, your money would have grown to $12,210, but you would miss out on $6,105, the employer match plus the interest on that contribution.
Indeed, one way Pendley and his wife built a $300,000-plus retirement portfolio was by putting in the maximum contribution and getting the full match.
If, however, you have one of those careers where job hopping is common, at least make sure the money you would have put into a 401(k) plan while waiting to become eligible is going into a tax-deferred IRA, if you qualify, Cumming said.