Retirement Q&A: Concerning '20-Somethings'

Continuing our interview with Kelsey, a 20-year-old senior working toward a bachelor’s degree in finance at UCO. This time the focus was on retirement. Even at 20, saving for retirement is on her radar, but she has some questions as to how to go about it.  

“I know it’s important to start saving for retirement earlier rather than later, however it tends to be put on the back burner in place of more impending things. 

“I see a lot of people who think they’ve saved enough to retire and later they find out that they didn’t plan for certain things that caused them to not have enough. I want to be overly prepared.”  - Kelsey 

I sat down to answer some of her questions: 

1.) How much does the average person spend per year when retired? 

There's a risk when it comes to using averages. You can work with them, but I’ve learned that averages just don’t work with each person’s specific financial situation. Because, when you think about it, it’s not just your income – everything effects that average. And you’ve got a whole range of incomes that are part of it, skewing it. On one end of the spectrum you’ve got someone like Bill Gates, while on the complete opposite end you’ve got a person in prison who has no money at all.  

What we have is a situation where I think averages, while they might be a powerful number to consider, aren’t something people really want. Most people – average people – aren’t saving enough for retirement anyway—do you really want average?  

Something you can do is look at your pre-retirement income. How much do you bring in a year, versus how much do you spend? Get into the habit of spending less than you earn early on and most people’s retirement plans work out just fine. 

2.) What are the best ways to gain interest on savings? 

There are basically three ways people make money on their money. First is interest from savings accounts, CDs, bonds, etc. Second is through dividends on stocks. And third is through capital gains. A capital gain occurs when let’s say you have a stock that goes from $100 to $200. That $100 increase in your capital gain.  

As for savings, right now there’s not a lot of interest being made. Currently a 10-year US Treasury bond is paying just 1.60%. Say you had money in a bank savings account. What are you really doing with your money? You’re loaning it to the bank to that it can turn around and loan that money to someone else for a new car, new house, to start a business, etc. And why does the bank pay that interest? That’s how they make their money. A bank pays 1% interest on someone’s savings account, and then charges 4% interest on someone else’s loan for a car. That 3% difference is their profit. Adequate savings allows you to invest.  

To answer the question: the best way to gain interest on savings is to put that money in a bank or credit union. Remember, true savings is NOT an investment. You DON’T want to take risks on savings money. Put it in a place where you know it is safe. Keep in mind that you don’t want to put more than $250,000 in one bank because the Federal District Insurance Corporation only covers that amount in a bank for any one saver. There are some games you can play with that, but generally that’s the rule. This isn’t really an issue for most young people, but I it's a fact that should be noted. 

3.) What should a person in their early 20s be doing to save money for retirement? 

From a financial planner’s standpoint, $1 less of debt is the same as $1 more in savings. That’s because it all contributes to net worth. If you have student loans that charge 5% interest, and you have savings money that is only earning 1.5%, then clearly you can take that savings money and pay it against the debt, and you would be better off by 3.5%. You should always have money in savings if you have a choice. Otherwise, you could end up right back in debt again.  

If you work for a company that has a savings plan (401k or 403B are the two most common), then if that company puts money in (matching contributions: you put in $1, they put in $1), that’s a really good place to start. Take advantage of a company’s contribution early on. I wouldn’t do more than that until the individual has cleared their debt and has more money in savings for emergencies. 

An unexpected cost can spring up at any time – and these things usually have the most inconvenient timing. Try to have a balanced approach towards it, but again: each person’s situation is unique. The main thing is, within reason, do what you can to pay yourself rather than the bank—especially in these low interest rate conditions we find ourselves in now.