I recently had the opportunity to watch a video of couples talking about retirement, which, for them, was about ten years away. The couples were broken into three self-described categories: fully prepared, somewhat prepared, and not prepared. At the end of the video, the couples were asked what advice they would give to the next generation. No matter their preparation level, the unanimous answer was to start saving as soon as you can.
It’s a message I’ve given to my own children. In fact, right after I congratulated our 25-year-old son on his new job (yes, philosophy majors can find work), I asked when he could enroll in the company’s 401(k) plan. Unfortunately, he has to wait a year to participate, but this requirement is increasingly rare in the corporate world. Many companies auto-enroll new employees as soon as they start working. Some go even further and “auto-escalate,” or automatically increase, the deferral percentage each year. For example, of those companies who have their 401(k) plans at Vanguard, 32% offered auto-enrollment at year-end 2012 (compared to just 20% in 2008).* Companies are adopting these plan features as “best practices,” which should go a long way toward helping people save for retirement.
Joining a plan as soon as you can is a relatively painless way to get started since the first paycheck is net of the 401(k) contribution. I know this is a difficult decision for many new to the workforce because there are so many competing and new financial demands at this stage of life—living expenses that may include insurance, phone bills, and rent or mortgage payments. Many have to fit in student loan payments as well. The long-term benefits, however, can outweigh the short-term sacrifices. Not participating might mean foregoing the company match—a “guaranteed” return. For example, even a 1% contribution rate matched by a 1% contribution from an employer is a 100% return. It’s hard to find that anywhere else!
So, I’ll keep track of the calendar and be sure to remind my son when his one-year anniversary comes around. I’d like him to benefit from the advice that came from all the couples in the video: “I wish I’d started saving sooner.”
*Vanguard, How America Saves, 2013
Notes: All investing is subject to risk, including the possible loss of the money you invest.