While young American adults might actually spend less than previous generations, impulse purchases and a major shift away from pension plans has made saving for retirement a challenge.
The average employee waits two years to sign up for a 401(k), costing them $20,000 in savings, according to research by Prudential.1 But experts think it is more critical than ever for young adults to start thinking about retirement planning as early as possible.
Young people today are starting first jobs later and have a higher debt burden than older generations, according to Teresa Ghilarducci, labor economist and director of the Schwartz Center for Economic Policy Analysis at The New School in New York.
“The lingering effects of the recession of 2008 has made getting a first job a little bit more difficult. [Young people] are starting jobs later and they have less time to actually save for retirement,” Ghilarducci said.
Reaping the benefits of compound interest becomes harder as you age. Someone like Evans only needs to save an estimated 5 percent of her annual income to reach a retirement goal by the age of 65, said Ghilarducci, who also noted that 30-year-olds need to save closer to 10 percent and 50-year-olds who have not started to save should put away closer to half of their income to catch up.
Create your own path
Between 1985 and 2012, companies dissolved more than 80,000 retirement plans, according to the American Federation of Labor and Congress of Industrial Organizations.
Now 401(k) plans are the norm, often requiring employees to proactively opt in and make decisions about how to invest. Due to the shift away from pensions, younger generations need to learn how to make their money last up to 40 years after retirement.
“Choice overload makes choosing difficult,” said Eesha Sharma, assistant professor of business administration at the Dartmouth College Tuck School of Business. Research shows that too many choices and a lack of experience cause people to delay decisions, therefore costing them even more time to save. Some call the phenomenon “analysis paralysis.”
And millennials might not get much guidance from their parents, a generation more familiar with company-sponsored pensions than with the new system.
Train your brain to save
Financial nearsightedness and a tendency toward instant gratification are two real psychological obstacles to saving for retirement, according to Sharma. And those who grew up able to satisfy urges with a click or swipe may be even more susceptible to these all-too-human tendencies. Case in point: Evans wants to save responsibly, but, being a travel lover, she becomes impulsive when wanderlust strikes.
“I struggle with thinking in the moment,” she said.
Self-control in any domain is a natural challenge. The idea of self-control, where we override immediate impulses, is not an animal instinct, said Roy Baumeister, professor of psychology at Florida State University. Instead, we need to train ourselves to save by cultivating a deep belief that we are winning by doing so.
Evans, reflecting on her childhood, said she never saw the power and positive outcome of saving. “It’s just something my parents never did.”
Two years ago she met with a financial advisor to begin charting a stable financial future. It was her first serious step towards learning how to think ahead.
The meeting with a financial advisor was a serious wake-up call for Evans, who likened the experience to being told to lose weight—people hear that from their doctors again and again, but it doesn’t really concern them until there is a real medical issue. “Suddenly you just want to be really proactive about it,” Evans said. “Because of that meeting, I paid off my student loans first. Now I’m maxing out my retirement plan. I’m getting smarter about how I travel. Saving can be my weak spot, but I am really trying.”
*Name was changed for this article.
1Statistic from Prudential.
Illustrations by John Ed De Vera