Young Professionals Should Know This About Retirement
by Stacy Brasher on Oct 22, 2019
As we grow up, we come to understand just how terribly long some moments in
time can feel. For instance, a child will never understand how long the week prior to
payday can feel when money’s tight. Your teenager (probably) won’t appreciate that
hours feel like eons when you’re waiting for that "I made it here safe" call or text. While
it can be frustrating, it’s important to remember that that disconnect in our sense of time
is a two-way street. As our adult lives speed up and each day represents a smaller and
smaller drop in the bucket of our lifetime, we can forget just how molasses-slow time
runs for younger people. Do you remember how torturous, albeit delicious, the wait was
when the Christmas advent calendars would go up in December? Or when your birthday
month rolled around and you had to wait entire days–even weeks–for that anticipated
Though our perception of it varies greatly as we grow, time is always either our
greatest obstacle or our greatest strength in getting to where we want to be in life. In my
experience, the go-to hurdle that time throws at my clients is complacency. Specifically,
it’s exceptionally difficult for us to let go of the idea that retirement is forever tomorrow.
If I were looking at things through rose-colored glasses, I might say it’s a testament to the
American work ethic that for so many of us the idea of a day when we stop working
occupies an abstract, far-off place in our minds. The reality of the situation is too dire for
that attitude, though. The day will come, and the complacency that line of thinking breeds
leaves far too many hardworking people in crisis. For decades, retirement feels like a
great white whale. It's always somewhere out there, but forever out of reach. Then one
day we wake up in our fifties, and retirement is suddenly the albatross around our necks.
That said, I have to bring the issue to light because part of my job is forcing good
people out of that all-too-common conceptual rut. It’s a pitfall to which none of us is
immune. People are hardwired to prioritize instant gratification–the now–over long-term
gains. The most suitable cure for complacency, though, is an easy first step toward action.
Read on for my most suitable actionable tips young professionals can implement today to
set them on the right track for the future.
Would it surprise you to hear that three little letters can be the difference between
a comfortable retirement and struggling to make ends meet? When you understand the
power of the IRA (Individual Retirement Account) and its variants, you can take control
of your long-term goals and plans. Both traditional and Roth IRAs have pros and cons,
with tax considerations for both of them. Contributions to a traditional IRA are tax-
deductible for the year in which they’re made, though they will be subject to taxation
once withdrawn later. Conversely, contributions to the Roth variety are subject to
taxation up front, but they will be available tax-free once you need them for the retirement
phase of your life. Generally speaking, your income tends to grow as you progress
professionally, as will your tax burden. For that reason, the deferred tax benefits offered
by the Roth variant make more sense for most younger investors. Don’t delay–look into
creating a Roth IRA account with the help of a reputable financial services professional,
or talk with your employer about any Roth options within your existing 401(k) if you
have one. As a matter of fact, I established Roth IRAs for my 19-year-old son and 17-
year-old daughter. Both of them worked last summer and had earnings to contribute to
the Roth. The power of compounding tax-free over time will be amazing. Also, each of
them will be getting statements on the mutual funds we invested in so that they can track
their financial progress.
Once you’ve established yourself, my most suitable advice is to take advantage of
every tool in your adviser’s toolbox. For example, taking both the IRA variants above, it
can behoove you to seize upon the advantages of each in different ways. Before anything,
be aware of the contribution ceilings for both. The maximum annual contribution amount
for each has increased for 2019 and may well change again in the future. After you’ve
done your research, contribute as much as you’re comfortable with to a Roth IRA to help
guarantee you’re building your savings bit by bit. Then, take any leftover income and
begin building your taxable funds alongside. The benefit of diversifying in this way is
that you’ll have greater control over your tax obligations later in life. The most important
consideration to take into account is, once again, time. It takes decades to build up the
long-term nest egg you’ll need for retirement with a Roth IRA, but it’s a great idea to
start now if you’re a 20- or 30-something looking to make a real impact going forward.
After taking those big first steps towards a financially secure future, I hope you
feel inspired to dive further in and explore even more options that may benefit you as a
young professional. As you do, keep this central tenet at the heart of your big picture
strategy: the younger you are, the more aggressive you can afford to be. In the context of
retirement planning, taking an “aggressive” stance translates to moves like allocating
more of your 401(k) contributions into stocks. While those products may fluctuate more
with the market day-to-day, over the long haul they have the potential to provide a better
return. That insight is reflected in another key way in which more time may be your
greatest advantage as an investor. More time in the market affords you a longer period to
ride out the volatility that scares many away, unlocking that greater return potential
mentioned above. Plus, even when the indices do take a tumble, the money you continue
to contribute during the accumulation phase of your life will go toward buying cheaper
shares, which also proves to be a possible winning strategy over time.
To that point, given enough time and commitment to a sound strategy, even a
short-term “loss” can prove to be a long-term win for the young professional. If you
haven’t already, set yourself on the path toward the kind of future you can look forward
to after a long day on the job; dare to dream of that day when you can retire confidently.
The first dollar you put away will already put you ahead of about one-third of all
Americans, so don’t feel self-conscious about humble beginnings. When you’re ready, a
Certified Financial Planner ® like me can help you find your way through every phase of
your life. Let’s start today. After all, neither of us is getting any younger!
By: John Pelham of Pelham Financial, a partner of Nowlin & Associates.