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Saving for retirement when you're young

October 18, 2010

by Mary Ann Campbell | MoneyRates Guest Contributor

This article is part of a MoneyRates.com series, 10 steps to a comfortable retirement.

"Early money is like yeast; it makes the dough rise." --EMILY's List

The above slogan is shared with my college students each semester when we discuss the important of stashing retirement savings as soon as they start to work. I first heard it in 1992 when I was introduced to a member of EMILY's List, a political fundraising organization, in Washington, D.C. EMILY is an acronym for "Early money is like yeast; it makes the dough rise." The slogan stuck with me as a teaching tool to use in my personal and family finance classes when we discuss retirement savings.

My students have responded positively to the early money slogan, particularly after I show them an example of "Early Earline" and "Late Lucinda"'s retirement savings habits. (GetRichSlowly.org has a similar demonstration and an early money template for download.)

Start on the right track of retirement savings

Listen up smart, energetic young adults. When you understand early money and act on putting as much away as soon as you can, you'll create your own retirement security and opportunities.

1. Be proactive. You are ultimately responsible for funding your own retirement. If you want financial comfort in your retirement years, Social Security will merely be a floor or small percentage of your retirement. Moreover, there has been a complete shift in the way corporations require us to fund our own retirement through 401(k) plans and traditional and Roth IRAs. There are very few defined corporate benefit plans (that is, traditional pension plans) left on the planet to ensure retirement income for life.

"I think, more than ever, young people have skepticism of Social Security and corporate plans to provide a foundation for retirement," says Barry Corkern, a Certified Financial Planner. This skepticism is healthy. What we put in is what we'll pull out later. If we don't put it in, there won't be any retirement funds beyond Social Security to take out.

2. Embrace 401(k) matching funds. There actually is such a thing as a free lunch if your employer matches your 401(k) retirement savings. Not all employers match or can afford to in tough economic times. If your employer matches at all, whether it's 2 percent or 5 percent or more, do whatever it takes to contribute up to the match so that you don't leave free money on the table.

Eddie Ary, a finance professor at Ouachita Baptist University, says that those in the workforce should think about an employer match as "an addition to their salary."

But an employer match is money that you can never come back and pick up later. Take your lunch to work, stop spending in other areas -- do whatever it takes to focus on accumulating your match.

3. Understand the magic of compound interest. The concept of compound interest is amazing, all-powerful and dizzying. Compounding happens when your money earns interest, and the interest added also earns interest. Albert Einstein is reported to have described compound interest as "the most powerful force in the universe." (Unfortunately, this effect works the exact same way against you with credit cards -- which you can see with a credit card calculator -- which is why it's vital to keep consumer debt balances under control at the same time.)

The fact remains, the sooner you start to put money away, the longer it will have to grow and compound on the interest earned. It doesn't have to be a large amount. Just get into the retirement savings habit. I call it sending your money to work while you're working.

4. See and believe. Ary demonstrates to his students how much they would need to save yearly to have a million dollars in 40, 30, 20 and 10 years. "They are always amazed at how procrastination, even for 10 years, increases the amount they must save," he said.

Ary also gives his students an example to illustrate how investing aggressively -- in stocks, for example --decreases the amount they must save compared to investing conservatively, like in savings accounts and certificates of deposit.

Of course, higher average returns from aggressive investments come with higher risk of losing the money, so you have to determine how much risk you are comfortable with. But when you're younger, you are better able to bounce back from losses if the market does poorly, which is why most financial experts recommend a more aggressive investment strategy when you are further from retirement.

5. Capitalize on technology. Technology can improve your retirement advantage. Automatic bank drafts, financial software and website calculators can help improve your retirement planning and actions. Technological tools couple your financial literacy with your technology literacy, and that can help make you powerfully productive in growing your retirement funds.

Being proactive, embracing opportunities, understanding investment growth strategies and capitalizing on technology tools can provide you the savvy advantages you need to plan to retire in comfort. Yes, even retire rich. It's up to you.

Read more financial advice from our series, 10 steps to a comfortable retirement.


About the Author:

Dr. Mary Ann Campbell, CFP® is a spokesperson for IndexCreditCards.com. She was named by Money magazine as one of America's 200 best Certified Financial Planner® Practioners. She currently teaches personal and family finance at the University of Central Arkansas and is an experienced on-air television and radio personality who specializes in business and financial reporting.


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