I recently had the honor of writing a piece on building wealth through intentional and strategic retirement planning. Hopefully the piece will be shared soon, but nonetheless, I will use this platform (via a multipart posting series) to share some of the same insights that I included in the writing. This concept, wealth from retirement planning, will be broken down into multiple parts because as exciting as this undertaking was, the concepts are lengthy and outside the scope of the type of blog postings that I write. Although this post (Part 1) and future associated posts are much shorter and less intense than the previously written piece they still require a great deal of thought and internal debate as I attempt to thread the needle between technical governmental provisions and keeping the audience’s attention. With that said and for the sake of time and mental energy, below I will just take a few sections from the piece to build the foundation of this posting series:
- What are we doing here?
It is my goal to dispel some of the misconceptions and misunderstandings about your employee benefits, and to show where you might be underappreciating important wealth building vehicles. My plan includes taking a look at defined contribution (DC) and defined benefit (DB) plans, i.e. 401(k)s and traditional pensions, building on these points with Individual Retirement Accounts (IRAs), tying these together with arguably the most important features, tax deferment and compounded interest, and concluding with how the uncertainty of healthcare fits in. At the foundation of these wealth building opportunities and the common theme throughout this article is the ironic fact that for once the government is desperately trying to give you money, or allow you to take more of your money.
Do not fret, I am going to take this slow. As a millennial I understand too much information or an overload of facts and figures, while at times persuasive, can lead to a counterintuitive result. This is similar to the type of counterintuition you had when you were in college, or if you are currently there, and you need to plan next week’s social, the football game is on Saturday, you have 2 upcoming tests, a paper to write, and need to call your mom back so you make the executive decision to just take a nap.
- Why am I writing this?
Honestly, I am writing this because I got irritated. A few weeks ago I came across another talking head on television painting the bleakest picture about my fellow millennials. Something to the effect of, “…these millennials do not even have $1000 saved up, how the hell are they going to fair when they get older. Maybe these young people could buy houses, cars, prepare for retirement and help out the economy if they put down the Starbucks, went without avocado on their toast and blah blah blah.” Granted, there is a great deal of bad decision making and self-induced financial strain that can be attributed to people in my age group. However, there are many millennials that are building an excellent financial foundation, and many more would be building similar foundations if people in the know would direct real energy towards teaching rather than lackadaisical critiquing. Likewise, this irritated me because yet again there was someone with a platform pointing out problems without equal time to providing solutions. Although it can get costly, going “without avocado” is not a solution that I believe will make huge inroads when making your 5, 10, and 20 year goals. Lastly, I am irritated at the thought that some people really believe that the overall desolate financial picture surrounding millennials is because we do not care, rather than we do not know what to do, which I feel is the overwhelming cause.
The government makes it reallyeasy for your money to grow. When I say grow, I mean grow at exponential rates if you comply with the rules and take your time on what you are doing. One of the largest tax expenditures (meaning the government forgoing the collection of taxes on something) in the country is employee benefits. The holistic design of this system is in place to both entice people to save for retirement and for employers to offer employer-sponsored benefits. Like most times the government incentivizes you to do something, it is so that you will not be dependent on them down the road. In this case, I believe the government’s thinking is something like, “the more people are saving for retirement, the less dependent they are on us when they get older, and the better the economy does in the long run.” With that established, my focus is not to explain each of the financial vehicles below, but rather why it is important to participate and how it will enhance your financial portfolio. Before we talk about it, let’s quickly discuss some common misconceptions.
In my experience, the most common misconceptions and misunderstandings that I have seen concerning employee benefits and retirement savings are people believing something close to the following: a) I do not have time to worry about that, b) I have plenty of time to worry about that, c) it’s too hard to understand, or d) I do not have enough money right now to invest in retirement.
Do not get me wrong, these all look like arguments with a semblance of validity on their face. However, going through this article coupled with my quick address of the arguments below you will see them fail when critically read in the bigger picture.
a & b – From an employee benefits perspective, time is always a good thing. More time gives you additional opportunities to build your portfolio and maximize your returns. However, the longer you wait, the more money that you potentially leave on the table (a good example on the impact of wasting time is shown later in the article). Naturally, you are young and this might not seem like huge deal now, but every moment that you wait to invest there is potential income that someone else is capitalizing on. As a millennial, someone capitalizing on money that could be going to you should make you feel a type of way. Likewise, it is funny to hear a millennial say that they do not have time when almost every millennial that I meet has immediate aspirations and goals to “learn about and invest in Wall Street,” but the vast majority are not even connecting the dots that they could already be investing in Wall Street or are currently invested in Wall Street through their applicable retirement accounts. Said all that to say, time should not be an issue because being financially free is worth your time and in many cases, a few slight modifications can get you exactly where you want to be.
c – Employee benefits and retirement planning builds on itself. I will be the first to tell you that it is not an “easy” topic, but it is also not “rocket science.” The key is to start somewhere. That may sound cliché and uneventful, but it is the truth. The enemy of progress is perfection, and I will tell you now there is no perfection in structuring your retirement savings. Everyone is different, everyone has different goals, and everyone plans to walk individualized paths throughout their career. The inherent beauty in this individualization is that you can feel comfortable with the path that you choose because it is not expected to mirror anyone else’s. I briefly touch on suggestions on how to start investing later, but generally speaking you have to just act. Do your research. Talk to professionals. Talk to your parents. Talk to grandparents. Talk to your company’s human resources department. Read your employee plan documents. There is no exact science. Just action!
d – You may feel like you do not have enough money to invest, but again, mere modifications and slight upticks can pay dividends down the line. You may already be contributing to your retirement accounts, but take a fresh look at the provisions and see what you are contributing. By the same token, contribute anything that you can spare. Even if you cannot max out to the limit or hit an employer contribution match, which we will discuss shortly, does not mean you should not contribute anything. As you will see, every bit helps your future. The takeaway is not to get caught up in an all or nothing mentality.
At this point in the previously written piece I go along and talk about the intricacies of the retirement vehicles, how they fit into a balanced portfolio and the magicof timing and compounded interest. To close out Part 1 I will just briefly touch on this magic and give you an example used in Colleen E. Medill’s Introduction to Employee Benefits Law: Policy and Practice:
George and Maria are both age 20. Maria decided to save $2,500 in her 401(k) plan account each year for 10 years. George, on the other hand, says, “I’ll wait. I’m young and have plenty of time.” So he saves nothing.
At age 30, they reverse roles. Maria stops saving and George starts to save $2,500 a year in his 401(k) plan. They continue this strategy for the next 35 years, with each earning an 8% annual return on their money. Our question for you: Who has more money at age 65? George or Maria?
You would think it’s George. After all, he saved over three times what Maria did – $87,500 versus $25,000. But Maria’s ahead at age 65. She has over $114,000 more ($535,472) than George does ($430,792), even though she saved $62,500 less. How did this happen you ask? The power of compounding.
In the example, Maria and George both chose to leave the investment earnings in their accounts and reinvest the earnings. As a result, the amount in their accounts that earned an average annual return of 8% grew larger, year by year, not only as a result of additional contributions, but also as a result of accumulated investment earnings. The net effect was to increase the compounded rate of investment return to far more than 8% for both Maria and George.
Certainly, one should do his or her research and due diligence before jumping into anything; however, it is generally much more conducive to your long-term financial standing to actually invest through retirement accounts rather than having a pile of money merely sitting in a regular bank account accruing 0.005% interest. Tax advantages, compounded interest and timing is something we will dive into on Part 2 of the series.
Colleen E. Medill, Introduction to Employee Benefits Law: Policy and Practice, (4thEd. 2014)