Young people, don’t let this happen to you. Plan for retirement now!

Young people, a.k.a. “Millennials,” have the time horizon that should allow them to save well, and thus avoid the need to save much more in later years. Otherwise, they will end up like those now nearing retirement that Theresa Ghilarducci describes in her 2012 article on retirement:

Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day. See Our Ridiculous Approach to Retirement.

Acting now is crucial, but what do you do?

Step 1 – As a Millennial, accept that you need to start saving now and commit to acting. For encouragement, remember that:

The 35-year-old would need to boost her contribution rate to 9 percent to achieve the same result as the 25-year-old starter who was saving 6 percent. (from Retirment Saving for Young People) See You can Ignore Most Financial Planning Rules.

Step 2 – Identify how much you need to save by using a retirement calculator. There are many calculators you can use – see what we listed in The results from retirement calculations on different websites vary. Why?

Step 3 – Follow this hierarchy for how to set up accounts for your savings:

Start with your employer plan, 401(k), 403(b) or if you are self-employed, SEP-IRA. The contributions you make to a 401(k) or 403(b) are made from payroll deductions, so you never get a chance to spend this money. The deductions reduce your taxable income now, so the government is effectively helping you to save. Also, the amounts invested grow “tax sheltered,” meaning that you pay no tax on any interest, dividends and capital gains. However, when you retire and withdraw from the plan, you are taxed on that amount as regular income.

If you save more, use a Roth IRA next. Set up an auto debit from your checking to fund your Roth IRA, so contributing works like payroll deductions. The amount contributed to a Roth IRA is not deductible, but amounts withdrawn at retirement are not subject to income tax. The amounts invested grow tax sheltered.

Finally, if you still need to save more, set up a “taxable account,” meaning an account with no tax sheltering benefit. You can use auto-debit to add to this account.

Note: for the Roth IRA, you must qualify and have earned income from which to make contributions to the account. Also note that, for any of these tax sheltered plans, withdrawing funds before age 59½ may subject you to a 10% penalty in addition to income taxes, so do not fund any plan when you expect to need withdraw the money before retirement.

Step 4 – Invest. And when you invest, stick to the plan you set in place (this cannot be over-emphasized). The time to retirement is decades away so you can afford to take risks, some of which will take many years to pay off. If you panic and sell, you only lock in a loss; but if you weather the ups and downs, you will be far ahead. (see Don’t Let This Happen to You, Plan for Retirement Now)

Creating an asset allocation, where you diversify among stocks, bonds, real estate and cash. Include large cap, mid-cap and small-cap stocks, as well as international stocks. You man also include invest in real estate investment trusts (“REITs”) and hard assets. You can use exchange traded funds (“ETFs”). The low fees of ETFs leave more invested to grow, compared to high fee and load funds.

If you on-going advice, you may want to check out alternatives such as LearnVest and the new Future Advisor website.

Don’t just Speak to Your Parents, Do your own Planning

As young people, a.k.a. “Millennials,” graduate, become employed, start businesses and have families, their finances change. With increasing complexity come many options they must evaluate, as well as new responsibilities. Millennials are more educated that prior generations, but they are also saddled with greater student loan debt than any prior generation. And, despite their higher level of education, they get low marks for financial literacy according to a recent U.S. Treasury Department and Department of Education assessment.

What are they doing about their finances? Sources like Pew Research Center tell us that many Millennials seek advice from their parents. Unlike Boomers who did not want to speak to their parents, Millennials often share interests with their parents and correspondingly seek their counsel.

However, taking financial advice from their parents may not a good approach because many of their parents lack sufficient savings to fund their retirement needs. Mark Grimaldi, co-author of “The Money Compass: Where Your Money Went and How to Get It Back” says “never take advice from someone less successful than you are.” He continues: “With almost 30 years investment experience, I can say with complete confidence that many baby boomers, the parents of Gen Yers, are in a financial mess.”

What, then, should Millennials do then? Talking to their parents is not inherently bad, so long as that is not their sole source. “Of course, there’s a difference between receiving [parental] advice and relying solely on the advice given,” says Kristen Robinson, senior vice president of Fidelity Investments’ women and young investors’ products. “Gen Y should listen to what parents have to say. But at the end of the day, financial decisions are personal matters and best made after carefully considering a number of factors and doing research.” From Millennials: Stop Taking Financial Advice From Mom and Dad. She concludes that Millennials really need to do is find ethical professionals for help.

So, how do they do this? They search the internet of things, of course! But, wait, is that how to find truly ethical professionals? Yes, if you search with care.

Look for:
Credentials – check out their bio, are they CFP, JD, or CPA? these help validate the advisor;
Content – are they providing original advice that is sound, helpful?
Website design – professional, kept up-to-date?
Clients – who is using them for advice?;
References – who is willing to put their own reputation at stake for this website?;
Community – who are their partners and advisors?;
 followers, fans, subscribers and user testimonials – more validation;
Website design – professional, kept up-to-date?
Avoid:

Tacky websites that don’t pass the “smell test” – if it “smells bad,” then it probably is;
Old content and closed comments;
Too many ads and pop up ads directing you to buy life insurance, etc.; and
No links to anyone you have ever heard of.

For example, companies like LearnVest and Workable Wealth provide general advice to educate before you pay. Workable Wealth has stated in blog posts the hope that educating will lessen the stress of handling your finances.

Don’t Rush to Pay off Your Student Loan – make a plan first

This may surprise you: you should worry more about saving for retirement than paying off your student loan. Yes, there are many bloggers testifying to how they paid off their loans, and many trying to tell you that you need to too. The frequency of such posts does not mean that they are right, or that they have factored in all that you need to for a “best use of cash flow over time” plan. In fact, paying off student loans that have relatively low interest rather than investing will be a costly mistake.

Compare student loan payoff blog posts to the many advisors who encourage paying off your mortgage. The urgency to retire your mortgage belongs to the Silent Generation, who survived the Great Depression and are risk adverse. Paying off a mortgage is usually not the way to maximize your net worth. (Watch for a post on “rent vs. buy” discussing investing and use of mortgage debt.) Furthermore, tying up so much capital in a house lacks for diversification and liquidity – you cannot sell your daughter’s room to cover tuition when she goes off to college.

How do you decide what loan to pay off when? Start with this rule:

Whenever the interest rate on debt is less than the annualized return on investments, only pay the minimum on the loans

because the investments will grow faster than using the same cash to pay off debts

The term “annualized” returns is key here, as one good year is not a good measure, nor is a recent bad year; you want the 5 or better 10 year average return.

Next, when applying this general rule to yourself, be sure to use after-tax values. You can deduct home mortgage interest in most cases, a portion of student loans in some cases, and credit card debt in almost no cases, while you can deduct your investment in your retirement plan and what you invest grows tax-free until withdrawn. Roth IRAs do not give you a deduction now, but do grow tax free and withdrawals are tax-free.

Here is a quick example: say your retirement plan is all in ETFs, so it grows at about 7% per year over time, say you have a student loan with an interest rate of 3%, because you consolidated all your undergrad loans, and it has a minimum payment of $500 per month, and say you have $1,000 per month for which you want to devise the best plan. Apply no more than the required minimum to student loan and invest all the rest, maxing out your 401(k) or 403(b) plan first, and then investing in a Roth IRA next. In 10 years, you will be so much better off than the person who used the full $1,000 to pay her student loan. What if you had a loan with an interest rate of 8%? Tough call. However, because the loan is compounding over time at a higher rate, that persuades me to apply more to the loan, provided that doing so did not give up an employer match on a 401(k) plan.

These examples are overly simple, I realize. Many of you face the quandary of student loan vs. retirement funding vs. rent or buy a home and more. I am working on that …. (Watch for a post on integrating decisions on buying a home, paying off student loans, investing for retirement and all the other issues you are likely to face.)

Steve Jobs said: “Stay Hungry. Stay Foolish” – so how does that help your career path?

Michael Simmons recalled the impact of Steve Jobs last January in Top predictor of career success 2015.

Simmons then says: “We think we understand what caused his success. We don’t. We dismiss usable principles of success by labeling them as personality quirks. What’s often missed is the paradoxical interplay of two of his seemingly opposite qualities; maniacal focus and insatiable curiosity. These weren’t just two random strengths. They may have been his most important as they helped lead to everything else … Jobs’ curiosity fueled his passion and provided him with access to unique insights, skills, values, and world-class people who complemented his own skill set. Jobs’ focus brought those to bear in the world of personal electronics.”

In the post, he quotes Steve Jobs form 1995: “Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something.”

How does any of this relate to you and your career? Simmons reports from his 2013 interview of an expert on networks that a key indicator is being in “open networks.” He then indicates how that is beneficial:

• More accurate view of the world. It provides them with the ability to pull information from diverse clusters so errors cancel themselves out. Research by Philip Tetlock shows that people with open networks are better forecasters than people with closed networks.

• Ability to control the timing of information sharing. While they may not be the first to hear information, they can be the first to introduce information to another cluster. As a result, they can leverage the first move advantage.

• Ability to serve as a translator / connector between groups. They can create value by serving as an intermediary and connecting two people or organizations who can help each other who wouldn’t normally run into each other.

 • More breakthrough ideas. Brian Uzzi, professor of leadership and organizational change at the Kellogg School of Management, performed a landmark study where he delved into the tens of millions of academic studies throughout history. He compared their results by the number of citations (links from other research papers) they received and the other papers they referenced. A fascinating pattern emerged. The top performing studies had references that were 90% conventional and 10% atypical (i.e., pulling from other fields). This rule has held constant over time and across fields. People with open networks are more easily able to create atypical combinations.

Here is a quote that I find interesting (and can relate to):

This is challenging in that it can lead to feeling like an outsider as a result of being misunderstood and under-appreciated because few people understand why you think the way you do. It is also challenging, because it requires assimilating different and conflicting perspectives into one worldview.

And this really does ultimately get back to Steve Jobs, who said “Stay Hungry. Stay Foolish” If you have not read, or better yet, watched this, find time to do so: The 2005 Stanford commencement address Jobs – “Stay Hungry. Stay Foolish.”

Michael Simmons is a bestselling author and the co-founder of Empact, a global entrepreneurship education organization that has held 500+ entrepreneurship events including Summits at the White House, US Chamber of Commerce, and United Nations.

What we are reading – for laughs, for serious thought and discussion, and just because

She’s right: This is the Fourth Grader who Asked Obama to put a Woman on the $20 Bill, from BuzzFeed News

Technology: Musk Plots Energy Storage fix Where Utility Industry Failed, from Bloomberg

Humor: Cookie Monster, Life Coach – on YouTube

Health: A 2-Minute Walk May Counter the Harms of Sitting – Even a few minutes per hour of moving instead of remaining in a chair might substantially reduce the risk of premature death.

Language: 20 Common Phrases Even the Smartest People Misuse, from The Muse

Comedy: Penn Jillette’s Big Dumb American Crush on Howard Johnson’s, from Eater

How to Be Emotionally Intelligent – What makes a leader? Knowledge, smarts and vision, but also the ability to identify and monitor emotions and manage relationships. From the NY Times

Comedy: The Man Who Makes the World’s Funniest People Even Funnier. As comedies become increasingly improvisational, they need an editor like Brent White to sew them together. From the NY Times- Quote: “Sometimes you just create a joke out of nothing.”

How Music Hijacks Our Perception of Time, from Nautilus – Quote: “The Royal Automobile Club deemed Wagner’s Ride of the Valkyrie the most dangerous music to listen to while driving.”

What Is Your Purpose? We need to forge new ways to seriously discuss the deepest questions in life with modern tools. This is a start. From the NY Times