Investment report: Young workers on wrong track for retirement
Elderly workers are often cited as being ill-prepared for retirement due to the economic downturn. However, research from human resource consulting company AON reveals it may be younger workers who are worse off.
Despite having more years left in the workforce than their older counterparts, Generation Y is posed to struggle in retirement. AON says 80 percent of those between the ages of 18 to 30 won't have enough set aside for their golden years unless they change their money handling and investment behaviors.
AON Hewitt retirement research director Pamela Hess says despite having more time on their hands, younger workers face other pitfalls not experienced by older generations.
"Younger workers will have fewer future benefits from their employers and potentially the government," says Hess. "They need to save a third more in their defined contribution plans than workers who are nearing retirement today, but there's clearly a lack of urgency to proactively save."
AON estimates Generation Y workers need to sock away 18.7 times their pay for retirement, but the current rate averages just 12.4 of times. There are a variety of factors behind this trend.
The average bachelor's degree graduate faces around $20,000 in debt. A large amount of debt coupled with poor job prospects and stagnant wages is making it more difficult for younger workers to realize the benefits of their education and plan for retirement.
Ideally, a student selects the most affordable college available and utilizes a combination of grants and scholarships to get reduced costs. Taking advantage of federal student loans over private options and working if possible to reduce costs down the road is also a wise plan.
When a recent graduate has substantial loans to repay along with rent and a low-paying job, it can be difficult to figure out what to do financially. Many experts agree that funds left over from paying for essentials should be funneled into savings and retirement accounts.
A number of employers offer a 401(k) program that allows money to be withheld from a paycheck and deposited into an account tax-free. The invested funds' growth is dependent on how well stocks perform.
Another big benefit to the account is that employers frequently match contributions up to a certain percentage, allowing investors to automatically yield a positive return. Taxes are applied to the funds upon withdrawal. It's important for investors to note penalties apply if funds are withdrawn before retirement age.
"Employers can play a critical role in helping this generation of workers by being thoughtful about offering participants the help they need to get on the right track," says Hess. "Automated tools with more robust defaults, innovative matches, investment advice and personalized messaging leveraging innovative technology are effective ways to start and keep these younger workers on the right path."
Not everyone will work for an employer that offers a 401(k) plan, but that doesn't mean investing for retirement can't be done. Another sound investment vehicle is a Roth IRA. Contributions to the account are made with taxed income. Some people prefer the accounts as investors can select which stocks and bonds their money is placed in. The maximum amount a person under 50 can invest in a Roth IRA is $5,000 annually.
Learning the ins and outs of investing can seem daunting at first, so it may be a good idea for those starting out to hit the books again and read up on the basics. Whatever the investment decision, it's important to be educated in order to avoid falling victim to a loss of funds.
