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Anya Kamenetz Generation Debt

Anya Kamenetz, Generation Debt

Don't Wait to Invest in Your Future

by Anya Kamenetz

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Posted on Tuesday, April 22, 2008, 12:00AM

Have you started preparing for your retirement? If not, you should -- now.

The 401(k) is Americans' chief retirement plan, and the money you contribute at the beginning of your career has the most power to grow over time. A bill sponsored by Rep. George Miller (D-CA), likely to be voted on next month, would make it easier to make good decisions about your 401(k) by requiring clearer disclosures about fees and commissions, and requiring plans to offer a low-cost index fund option.

That's great, because if you're like most young people -- heck, most people -- you feel you don't know enough, or you don't make enough, to get started with investing for retirement. But you shouldn't wait for the laws to get less confusing. There's no day like today to start contributing to your future.

Marc Bruno would certainly agree with that statement. He's a journalist in his early 30s who started working for Crain's Pensions & Investments, an industry publication, a few years ago.

"Every other week we were writing about a different company freezing its defined benefit [pension] plan and enriching the 401(k) for new workers," Bruno says. "And it dawned on me, I'm that new worker and so are my friends and peers."

So he wrote the book "Save Now or Die Trying: Achieving Long-Term Wealth in Your 20s and 30s" to give us the information that's not always included in that confusing packet Human Resources provides. Here are Bruno's essentials.

Just Do It

"The biggest mistake people make is just not participating," says Bruno. "It's amazing how many people don't bother. You just don't realize how much money you're leaving on the table."

Shockingly, only 18 percent of workers under 24, and just 38 percent of workers under 35, contribute to employer-sponsored retirement accounts even when they are available.

The rewards of contributing are threefold. One reward is the employer match: If you put in money, your employer will put in money, too. The second is the tax-sheltered nature of 401(k) contributions -- money that you put in is deducted from your taxable income. The third is the time value of money; thanks to compounding, money you save in the beginning of your career will grow much more than anything you sock away in your 50s.

Bruno spells all of this out with real-world examples. Here's one:

Let's say you make $50,000 a year and have a 100 percent employer match on your 401(k). You contribute just 6 percent of income, or $3,000 a year. At the end of the year, you have $6,000 saved for your future, and you bring home $34,310 after taxes. When you retire, 30 years later, that one year's contributions could be worth $45,674 or more.

Your sister is making the same salary, but she chooses to save $3,000 in a regular savings account. At the end of the year, not only does she have just $3,000 banked (plus maybe 2 percent or 3 percent interest), she's netting just $33,500 in take-home pay, because she took neither the tax benefit nor the employer match. That's what they call leaving money on the table.

So call up your HR department today and say you want 6 percent to 10 percent of your paycheck placed into your 401(k).

The Circle of Life

Have no idea where to put your 401(k) money? Don't want to spend more than five minutes deciding? Bruno has this advice for you: Choose life-cycle funds. These are the options with dates at the end like Fidelity Freedom 2045 or State Farm LifePath 2030. There's a list of low-cost life-cycle funds here.

The beauty of a life-cycle fund is that it has a predetermined mix of stocks, bonds, and other investments that automatically rebalances over time for the correct mix of growth and stable value. It is designed to be a one-stop shop; theoretically, you could put all your money into a single life-cycle fund from now until retirement and be just fine.

"I'm a huge fan of autopilot," says Bruno. "It's like having your own money manager."

But if you want a little more control and you've graduated from the fingers-in-your-ears stage of investing, listen up. In your 20s, your retirement money should be invested in 80 percent to 100 percent stocks. This is important -- the stock market has been volatile lately, but as a young investor you have the luxury of taking the long view, and stocks simply provide the best options for growth.

First, look to the U.S. market, where you want to own a mixture of large-company stocks, known as large-cap for capitalization (like the S&P500), and small-cap stocks (the precise proportions will depend on your risk tolerance).

Then, Bruno and I agree that the most important direction for diversification is in international funds -- both developed countries and emerging markets like China, India, and Brazil -- such as the Fidelity Spartan International Index or the Vanguard Total International Stock Index Fund. This is true especially now, because U.S. markets represent less than half -- and falling -- of the value of global equity markets.

Be a Cheapskate

Overall, Bruno says his best piece of investment advice came from Christine Benz, the director of mutual fund analysis at Morningstar  and co-author of the "Morningstar Guide to Mutual Funds": "The investor who shops for the cheapest funds will usually be far better off than the investor who chases the funds that have had the best past performance."

This means you want to look at the expense ratios of your funds, which are published right up front in any prospectus, and try to make sure they're well below 1 percent. Index funds tend to be the cheapest because they are not actively managed. That means, rather than buy and sell the stocks in the fund often to try to get the best returns, an index fund simply holds a little bit of a very large number of stocks, aiming to replicate a stock index such as the S&P 500. (See a long list of no-load index funds here.) The original index fund was the Vanguard S&P 500, which still has some of the lowest costs in the business -- currently an expense ratio of just 0.15 percent.

Beat Debt

One of the common excuses Generation Debt gives for not saving for retirement is that they have student loan and credit card debt to pay off first. In most cases, that argument just doesn't wash. Are you really dedicating every extra cent to paying down debt, or will you not even miss a 6 percent deduction from your take-home pay every two weeks?

If you have student loans, make the standard payment each month and contribute to your 401(k), too. 401(k)s, with the employer match and tax benefits, offer a return that beats the pants off of the 3 percent to 7 percent interest you're paying on your student loans.

The only time it may make sense to defer retirement savings for a bit is if you have a massive amount of high-interest credit card debt. Then Bruno has a suggestion for you: Consider taking a loan from your 401(k) balance. Instead of paying back 10 percent to 20 percent to a credit card company, you'll be repaying a low level of interest to yourself. But be careful. Some of the risks are summarized here.

You Can Take It With You

A final wrinkle that comes up in employer-sponsored retirement plans is that young people switch jobs a lot -- according to the Bureau of Labor Statistics, 10 times by age 36 is the new norm. The youngest workers, those younger than 25, are also twice as likely to hold a temp, contract, or other type of job without benefits. This all means we're very unlikely to have our retirement decisions taken care of with a single 401(k) plan. But that's okay, as long as you're prepared to take the correct steps to roll it over.

That's why young workers need to know the ins and outs of Individual Retirement Accounts, or IRAs. I'll cover that in next week's column.

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110 Comments

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  • Yahoo! Finance User - Sunday, April 27, 2008, 10:58PM ET  Report Abuse

    • Overall: 4/5

    I think the article is all right, young people should follow. However, borrowing from 401k is not a wise idea: if you lose your job, you will likely have to pay the full borrowed amount or making payment while you don't have enough money as in unemployed situation.

  • Yahoo! Finance User - Sunday, April 27, 2008, 8:58PM ET  Report Abuse

    • Overall: 3/5

    Throughout my 20s, I didn't have a stable job woth looong periods of unemployment, and could not invest in the market. Once I landed something consistent, I started contributing to my 401k. Ten years later, I have $65k in the bag for retirement. The 401k vehicle far outstrips any other savings method that I've encountered so far in gaining value, and I heartily encourage everyone who can to start now, not for any particular number that the stocks or stock indexes hit (absolutely nobody can predict where the bottom of the market will be).

  • Fred - Saturday, April 26, 2008, 9:47AM ET  Report Abuse

    • Overall: 1/5

    This woman is not writing for your best interests in mind, and if you think the timing of this article is random, then you need to stop being naive. The dow and S&P right now are sitting on the very high end of the 296 day moving averages and the 198 day moving averages, both with downward trends. Since there hasnt been on solid piece of good economic news(in general) since 2006, I feel she must want you to lose money. Only a fool would enter the market right now for long term investing. Wait till the dow hits 11600, then you can begin to think about buying into the most manipulated, corrupt finacial system in the word, mosted intended to take dumb money out of circulation, and if possible your 401K in the process, see Bears Sterns, ENRON, etc... I would NEVER trust ANY company with my savings in a company stock you work for. If you are a young investor, wait, and then if the rubble clears, and our world is left standing, buy some gold or silver, or oil stocks, and tune out the rest of the stupid world.

  • Darren - Friday, April 25, 2008, 3:24PM ET  Report Abuse

    • Overall: 4/5

    Good basic knowledge that everyone should know.

  • Carlos - Friday, April 25, 2008, 2:54PM ET  Report Abuse

    • Overall: 2/5

    Yahoo as any smart company should pay her and the other editorialists based on their "Rating". I would fire her just for not achieving a minimum of 3 stars in 60% of her articles.

  • Yahoo! Finance User - Thursday, April 24, 2008, 9:31PM ET  Report Abuse

    • Overall: 1/5

    Anya had to write this common sense basic article to get a decent rating because of her vote liberal crap and her other crap articles the past few weeks that nobody liked. She is a very pretty girl but not the sharpest tool in the shed if you know what I mean. Yahoo finance is such crap. You have people like Anya and the blogger post fluff and yet people come here looking for investment advice. Obama wants to raise the cap gains tax from 15 to 28% and no real investors want that yet Anya is tooting that guys horn because he speaks well and promises lots of handouts to the young generation. NO, I don't want that. A real financial expert would talk about the almost double in cap gains tax and how that will dcik all of us investors in the name of being " fair".

  • JazzMan - Thursday, April 24, 2008, 8:03PM ET  Report Abuse

    • Overall: 4/5

    C'mon, some of these comments are pretty brutal. The article is geared towards young people with little or no investment knowledge or experience. As such, the article meets its target - basic, simplistic talk re: the benefits of contributing to a 401K. And - not that it has anything to do with the article - I think Anya IS attractive.

  • Yahoo! Finance User - Thursday, April 24, 2008, 6:26PM ET  Report Abuse

    • Overall: 3/5

    cool

  • Yahoo! Finance User - Thursday, April 24, 2008, 6:18PM ET  Report Abuse

    • Overall: 1/5

    To the commenter who said Anya belongs in a college newspaper...that's simply not true. She's not good enough to write for a college paper. Oh my god....do you get paid to write this? Yahoo Finance is a JOKE! I will keep looking for a real finance site.

  • stevem - Thursday, April 24, 2008, 2:51PM ET  Report Abuse

    • Overall: 4/5

    To Warrantystud, crowded_space, and all your siblings crying about “oh, I have seen this same content 1000’s of times before”, well NO CH!T !! When you see an article titled “Don’t Wait To Invest In Your Future”, do you really expect an in-depth synopsis from Senior Professors of Wharton and detailed advice from Executive Financial Advisors for Fidelity? Some of you need to stop and think about your own disposition before you whine about another person giving so called ‘stupid’ advice.

  • DennisAOK - Thursday, April 24, 2008, 1:23PM ET  Report Abuse

    • Overall: 4/5

    I would only add that we should not have to be so tied for our investment choices to whoever our employer happens to be. For those of us who do want to save, why not have the option of putting thsame amount of of money into a tax deductible IRA of our own choosing? As with health care, Congress wants employers to take care of us, and sets up tax incentives to do so. I'd rather take care of myself and get trhe same tax treatment as my employer.

  • worldmap - Thursday, April 24, 2008, 1:05PM ET  Report Abuse

    • Overall: 1/5

    As always, 5 stars from Mommy and 1 star from investors. Save early and save often - gee, have I heard that before? Let me think... oh, that's right! About 1,000,000 f****** times

  • Yahoo! Finance User - Thursday, April 24, 2008, 11:20AM ET  Report Abuse

    • Overall: 5/5

    Here's the contrarian again! I see a lot of 1 stars and I'm putting up 5. This advice is simplistic, but I agree with it. Start a 401K ASAP kiddies! One day you too will be old... if you are lucky. If you aren't lucky you will be dead! But I do agree with the previous poster... I would not mind "being Anya", Anya.

  • Da Big Guy - Thursday, April 24, 2008, 8:05AM ET  Report Abuse

    • Overall: 3/5

    Teaching young investors fundamentals is what coaches do everyday so that it comes natural on the playing field. Anya has been attempting to reach an audience with intense social pressures to "have" rather than save. So while this info may seem useless to some, the internet is loaded with young minds who read columns like this for their news consumption. If folks like RK and BS have this forum to push their mostly arrogant investment savvy, certainly we shouldn't be offended by Anya's basic reminder to save!

  • Shax - Thursday, April 24, 2008, 6:12AM ET  Report Abuse

    • Overall: 1/5

    Lifecycle funds?? Please write about something you know, Anya, to avoid looking very blond...

  • Yahoo! Finance User - Thursday, April 24, 2008, 5:45AM ET  Report Abuse

    • Overall: 1/5

    Useless article

  • Paul F - Wednesday, April 23, 2008, 9:37PM ET  Report Abuse

    • Overall: 3/5

    Wow this will be first column Anya wrote where I won't trash her for a being a socialist idiot.. Decent information, that everyone working should do, it;s forced savings and since it's pretax, you are giving yourself a nice write off at the end of the year...

  • Yahoo! Finance User - Wednesday, April 23, 2008, 9:35PM ET  Report Abuse

    • Overall: 5/5

    Their are too many sad scrooges on this board. Anya wrote a fantastic article. She does very well at what she does. How much of an evil twin do you have to be to bash a woman who is trying to teach the general public about the 401K plan? Most people I work with don't understand how a 401K works and I work for a freaking financial services firm. Just because you know about a 401K, I would guess that 3 in 5 random people you meet don’t fully understand how it works. Most HR orientations don’t go in to detail about their 401K like Anya does. So don't bash Anya for educating the pubic about something that many people don't understand. Simmer down Satan.

  • Yahoo! Finance User - Wednesday, April 23, 2008, 9:09PM ET  Report Abuse

    • Overall: 3/5

    While I agree that the information given by Anya is elementary, she is preaching the right aspects of savings. Everyone, at every age should learn how to save, and save religously. For those of you who say that people cannot make $50k in their 20's, you are all morons. As a 25 year old graduate with an engineering degree, I do much better than 50k, as does my roommate under a similar major. I have a revelation for all the art and recreation administration degrees: Choose a major that actually pays. That should be one of the pre-requisites to choosing a major in the first place. Also, every company that I interviewed with had a matching 401k program. Go out there, get a good education, and you will be comphensated accordingly. Otherwise, you deserve to be poor.

  • Yahoo! Finance User - Wednesday, April 23, 2008, 8:33PM ET  Report Abuse

    • Overall: 2/5

    would like to put some money away, but with the ever-rising cost of living it's impossible. the jokester we have representing us in the whut house has managed to do that all in only 7 years. in a time when all of the oil(pronounced "all" if you're from texas)companies are posting record profits, how can anyone say Bush isn't part of big oil? job weel dun George Dubya- you did what nobody thought was possible, you completely destroyed the American society.

  • pbergn - Wednesday, April 23, 2008, 6:36PM ET  Report Abuse

    • Overall: 3/5

    I agree only with the premise that one has to be fiscally savvy, and think about the better ways of conserving one's wealth, and ensuring the retirement assets. The advice is too generic and somewhat misleading: Fiscally it makes more sense to pay off the current debth, for most of it is in the form of loans or credit card debt, and ONLY then think of investing into 401K or IRA. Honestly, it does not make any sense to borrow even more to invest into one of the retirement savings instruments... Also, another thing to seriously consider before investing into one of these vehicles, is the related service fees and ever-accelerating inflation. And bear in mind that a $1,000 spent when you are between 25-45 years of age is entirely different quality as apposed to spending the same amount when you are 50 (that's without even considering the effect of inflation). In these times of financial uncertainty it makes more sense to spend the remaining money on upgrading one's skills or durable assets, or just enjoy the life, because as they say: "Tomorrow never comes". Overall, rated as good for promoting responsibility and awareness on financial matters among younger audience...

  • Michael H - Wednesday, April 23, 2008, 6:25PM ET  Report Abuse

    • Overall: 4/5

    This is a decent article that more 20 somethings need to hear about. I started investing in my 401k type plan at age 26. I'm now 37 and have around 130K in my plan (no employer match). I didn't earn super high returns either, nor do I earn a great income. In fact, I also had about 14K in student loan and credit card debt when I started back in late 1996. But I started with $50 every 2 weeks and kept raising it over time until I hit the max about 5 years later. And no, I don't make a huge income. I'm 37 and will make 50K this year. When I started saving, I was making 27K. I live in a very high cost area and 50K is an average to below average salary where I live. If you value financial freedom over stuff and following the crowd, it can be done.

  • Yahoo! Finance User - Wednesday, April 23, 2008, 5:50PM ET  Report Abuse

    • Overall: 1/5

    I dont want to leave money on the table nor do I want to contribute to the mutual fund system. If I call HR and ask them to just pay me would that be asking to much?

  • A - Wednesday, April 23, 2008, 5:21PM ET  Report Abuse

    • Overall: 1/5

    First, for crying out loud, consider your audience when you write. This is useless to anyone who will actually see it. Second, the masses who are now neglecting retirement savings aren't doing so because they don't know/make enough; they're doing it because they know that in the end, the government will tax the crap out those who have saved and use that money to house, feed, and medicate those who haven't. They are the ones with rational expectations; you and I -- the "cheapskates," the "ants," what have you -- are the suckers. Meanwhile, those nice historical returns we're all extrapolating will continue to be devalued in real terms by Fed chairmen all-too-happy to sacrifice millions of little savers in order to bail out politically connected I-bankers. American ideals are more alive today in Hong Kong and Singapore than they are, or probably ever were, here in the Union of American Socialist Republics.

  • Bones - Wednesday, April 23, 2008, 4:58PM ET  Report Abuse

    • Overall: 2/5

    So what you are really saying is.... SAVE EARLY AND SAVE OFTEN!! It sounds corny but that's the point of every one of these articles.

  • Biggus Dikkus - Wednesday, April 23, 2008, 4:33PM ET  Report Abuse

    • Overall: 2/5

    Eh, I have to agree with other comments about the relative uselessness of regurgitating generic retirement planning advice. Perhaps it would be more helpful to offer a simplified case study of sorts – present a common situation (Bob and Sue are 35 and want to retire at 65) and a template for approximating how much they'll need to save each year to meet their annual spending needs from 65 to “postretirement”. It's obviously a complex problem, but can be boiled down enough for people to realize get the idea (i.e., what's realistic and what's not). If people know the basic inputs – courtesy of a knowledgeable Yahoo!Finance columnist – all they need is an Excel spreadsheet or a $20 business analyst calculator to do a good gut check.

  • Eric G - Wednesday, April 23, 2008, 4:19PM ET  Report Abuse

    • Overall: 5/5

    The key point is: the earlier you get in, the better since the compound interest will grow tax free until you retire. This is a big advantage young people have.

  • matt - Wednesday, April 23, 2008, 4:14PM ET  Report Abuse

    • Overall: 1/5

    america is going down the tubes, politically, economically, etc. it will be a great time to capitalize if you know how. 9 out of 10 mutual funds lose money and thus are bad investments. americans need to learn how to stand up for the rights and claim what's theirs. in addition to a 401k (which I only keep cash in mine as i don't trust these fund managers and my average pick has thrashed all the indexes) we need to invest in individual stocks, ideally, high-growth value stocks. if older than invest in blue chip value stocks. and use common sense, invest in water, clean tech companies, oil companies, and foreign countries, india, china, brazil, israel, argentina, canada, mexico, or at least invest in us companies with international exposure. check, yum, sbs, ttm, crnt, cresy, pds, oyog.

  • Yahoo! Finance User - Wednesday, April 23, 2008, 4:12PM ET  Report Abuse

    • Overall: 1/5

    Rookie article. Anya, you should be writing in a college newspaper.

  • JoshaS - Wednesday, April 23, 2008, 4:11PM ET  Report Abuse

    • Overall: 1/5

    Like most 20 somethings have money to invest, unless they want to deprive their baby boomer parents of their own retirement ambitions. Just invest in the 401k! Wow, my 15 year old brother can come up with that advice. Please, let me know of at least one person who became rich just investing in the 401k plan at work. Unless you were in a company that was a part of a big merger, most people won't find there way to riches by just dong a 401k. About 85-90 percent of us work for small companies with less than 200 employees. For that matter, let me know of one person who got rich even investing in an IRA. With inflation and rising monetary expenses across the board, even at some point $1,000,000 won't be enough to supplement a full retirement at age 65. It's getting to that point today even unless you have a house that's paid for or close. People are also living longer and that is one of the bigggest issues concerning retirement, is knowing how long you'll live.

Showing comments 6-35 of 110<< PreviousNext >>

More from Anya Kamenetz

Read the Generation Debt Book

According to economics professor Laurence J. Kotlikoff, Generation Debt offers "a truly gripping account of how young Americans are being ground down by low wages, high taxes, huge student loans, sky-high housing prices, not to mention the impending retirement of their baby boomer parents." Generation Debt will inspire you to take charge of your financial future.

Read more from Anya Kamenetz here and here.

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