People often talk about micro- and macro-economics in the abstract, but sometimes you run into a perfect example of how a specific case resonates with a broader trend.
I was recently talking to a graduate student in his early 20s who just earned himself a paid internship for the year ahead. The compensation includes the ability to participate in the employer’s defined contribution retirement plan, and he was asking my advice about whether to defer some of his internship pay into that plan. That he even asked the question impressed me, because the last thing I was thinking of when I was a student was retirement saving.
Days later I was sent a copy of a Fidelity study which showed that younger workers seem to have taken the lessons of the Great Recession to heart, and are now approaching saving more seriously than their older counterparts.
Since my earlier conversation shapes up as a micro example of a macro trend toward younger people taking retirement saving more seriously, let’s look first at what the individual should consider, and then what may be influencing his generation’s thinking more broadly.
To defer or not to defer
Here are some of the issues I talked through with that graduate student:
- Is it too early? No. Retirement may be a long way off, but the sooner you start saving, the more chance you have to accumulate money.
- Can he afford it? This is the toughest part. Any pay for an internship is a plus, but this pay is fairly modest. Still, there will always be excuses not to save, so getting in the habit of dealing with less than your full paycheck will make it easier to save with each subsequent raise.
- Does he understand it? It’s tough to jump in and understand about retirement plan rules, deferral rates, asset allocation, and investment options. Still, this is knowledge that most people only gain with experience, so the sooner you start, the sooner you’ll learn.
- Is there an employer match? This, we agreed, could be the real tipping point in the decision. If the employer matches some of the contribution, it would be a waste not to contribute enough to earn that match. Why leave money on the table?
Ultimately, whatever that intern can contribute to retirement savings will help him get a head start on good habits and acquiring investment experience.
Lemonade and chicken salad
Like that student, other young adults appear to be taking saving money seriously. That Fidelity study found that among workers born between 1981 and 1988, 64 percent now save more systematically than before the Great Recession, compared with 54 percent of older workers. 48 percent of these younger workers have increased their emergency savings, compared with just 29 percent of baby boomers.
These trends are encouraging, but my concern is that right now, too many young people aren’t finding the jobs needed to put their good intentions into action. 7.3 percent of Americans are unemployed. That number jumps to 13 percent for people between 20 and 24 years old. On top of that, you can add a large portion of people who are underemployed, working in jobs that don’t offer much in the way of retirement benefits.
Still, history shows that occasions like these can become opportunities to make lemonade from lemons, or chicken salad from chicken… Well, you know the rest. Since the end of 2008, every five-year trailing period has seen real average annual Gross Domestic Product growth of 1.5 percent or less. Prior to the Great Recession, the only time in the last 70 years when real economic growth dipped below a 1.5 percent annual rate for five years was for the period ending in the second quarter of 1983. The good news, though, is following the second quarter of 1983, the next five years saw real economic growth average 4.66 percent.
Of course, thinking back on that late 1970s/early 1980s period, the generation that came through that hardship didn’t exactly do a bang-up job of saving for retirement. Perhaps this can be chalked up to two one-time events. First, an extraordinary run of stock market performance in the 1980s and 1990s spoiled investors into thinking they didn’t have to save much — double-digit investment returns can work wonders with even a modest retirement investment. Unfortunately, the next double-digit returns that generation saw were negative.
The other one-time event that helped sink retirement savings was the transition from defined benefit pensions to defined contribution 401k plans. This shifted the retirement savings burden from employers to employees — including the responsibility of knowing how to invest. The American workforce was in no way ready for that responsibility.
Ultimately, what might make a positive difference for today’s generation of younger workers is not only do they recognize the importance of saving for retirement, but with defined contribution plans now the dominant retirement vehicle, they should fully understand that the responsibility is all theirs.