Critical for Effective Wealth Building
Some watched the financial collapse in 2008 severely hamper their parents’ retirement plans. Others are simply working at jobs without pension benefits and doing the math.
For whatever reason, young people are starting to take a more serious look at their long-term financial future — a trend Patricia Grenier finds gratifying.
“For the first time in many years, I’m actually seeing young professionals — dual-income couples in their early 30s — coming in to talk about financial planning,” said Grenier, general partner with BRP/Grenier Financial Services in Springfield.
“That’s very surprising because, in the past, I always used to say, ‘I wish I could get them when they’re young, when time is on their side and they can ride the many ups and downs in the market.’ But now, they’re coming in at a much younger age, which gives us a lot more flexibility, a lot more time. It allows us to fix things and make adjustments as we go along.”
George Keady, senior member of the Keady Ford Montemagni Wealth Management Group at UBS Wealth Management in Springfield, makes a similar observation.
“The clear trend in the past five to seven years has been people starting younger,” he told BusinessWest, noting that some of that may be based on encouragement from their employers, many of which enroll them in self-funded retirement accounts almost immediately, and the employer must take the initiative to unenroll.
“Young people today assume they’ll have to take full responsibility for their retirement,” Keady said. “The era of defined benefits and pension payments is being reduced dramatically, so people are taking responsibility through 401(k) plans and savings.”
Doug Wheat agrees. “Certainly, many employers now automatically enroll new employees in 401(k) plans, and that has made a huge difference in what the participation rates are,” said the senior manager of Family Wealth Management in Holyoke. “While there may be more awareness, I think the automatic enrollment has made the most impact.”
While the world of the Internet age is definitely more educated on financial matters than it used to be, Grenier said many young professionals took lessons from the 2008 crash and what it did to the retirement savings of people they know, including their parents. Whatever the reason, they’re increasingly starting early to seek strategies to build and protect wealth.
“They’re more aware,” she said. “We have more knowledge 24/7; we know what’s going on. You can turn on the TV anytime and see exactly what’s happening in the world and in the economy. But there are strategies you need to apply that can’t be learned by turning on the TV. You have to sit down and plan.”
Pat Grenier says one of the biggest financial mistakes people make is underestimating how much money they will truly need down the road.
Some strategies are time-tested common sense, Grenier noted: save at least 10% toward retirement, prioritize spending and stay within one’s means, and do not build credit-card debt.
As for specific plans beyond the basics, when Grenier talks to younger investors, “they’re asking, ‘am I doing the right thing?’ even though retirement is 30 years down the road for them,” she told BusinessWest. “The lesson to be learned from this big downturn is you need to plan, you need to have a plan B, and if you think you have enough money, you don’t. You always need more money.”
To that end, she added, “I am seeing the younger ages more willing to plan and be flexible. And, unlike older clients, both spouses are usually involved in the decision-making process.”
Wheat said young professionals need to use the time they have to save for retirement, even though it seems so far down the road, “because they can take advantage of compounding interest by starting early. When you do that and build wealth slowly over time, the ultimate goal can be less daunting.
“If young people can target 10% to 15% of their take-home pay to put automatically in a 401(k) or 403(b) plan at work, it makes it relatively painless to contribute to retirement goals down the line,” he continued. “If they do that, it’s much easier to reach a retirement-savings goal which maintains their standard of living in retirement.”
That’s because, “in general, people underestimate how much they may need, and even when they’re contributing to a retirement plan, they often don’t contribute enough.”
If nothing else, Keady said, workers should maximize their company match if there is one, because every dollar makes a difference compounded over time. “If somebody starts putting $15 a week away in their 20s, in 40 years at 6%, they’d have $130,000.”
But that’s just the beginning, he said. “If they get started early, they can sit down and construct a real plan, not a one-size-fits-all solution. We have clients show up in their late 50s, and they’ve accumulated some money, but they really don’t totally comprehend what they need in the years ahead. People in their 40s who have accumulated some money have more options in the planning process.”
One reason young people might be starting on a savings and investment plan early is the cost of college tuition, which has far outpaced the general inflation rate over the past quarter-century.
“The young couples I’ve had this year are really concerned about the cost of education, what it will cost them to educate their children. Personally, I think college tuition is the next big bubble; it’s unsustainable,” Grenier said, noting that the average private college costs about $55,000 per year for tuition, room, and fees. “Even if their kids aren’t going to school for another 10 or 15 years, at today’s cost of college, there’s no way they’re going to be able to save enough money. Coming up with a strategy for them to alleviate the college load is really important.”
Wheat, who wrote about planning to pay for college in the May 6 issue of BusinessWest, agreed that it’s a daunting prospect. “Most people don’t have nearly enough to pay for college. The question becomes, how much debt are they willing to bear? Sometimes they take on more than they should — both college students and parents — and don’t think carefully about taking on more debt.”
For older individuals and couples, of course, expenses change as the retirement years loom.
“For people in their 50s and 60s,” Keady said, “those are the years where maybe tuition responsibilities are behind them, they’ve paid for their home, and now they’re thinking about themselves, thinking about retirement income, but also thinking about long-term care issues. That comes with longer life expectancy.”
What those people need to do, Wheat said, is to think about how much they need to maintain their standard of living, and then decide whether their goals are reasonable based on their expected income. If not, “are you going to cut back on your standard of living now or wait until retirement to do that, or do a little bit now and a little later?
“Most people, when they’re thinking about wealth building, really need to start with the basics of what they’re spending their money on and what their total expenses are,” he continued. “Are they spending money on things they really value, or are there places in their budget where they can cut back? For some people, creating artificial spending barriers is helpful for doing that. One of the classic ways to create an artificial spending barrier is to have part of your paycheck go directly into a savings account, where maybe it’s not as easily accessible and not as easily spent.”
Keady also suggested workers increase their withholding with every increase in their salary as another means to painlessly boost their savings. Still, Wheat said, most often the main issue is spending, not saving.
“It’s surprising how few people really know how much money they spend every year,” he told BusinessWest. “People know what their take-home pay is every week or every month, but they don’t necessarily think about it in terms of how much they’re spending for a whole year. The end result, for a lot of people, is spending small amounts of money on lots of things that are not that valuable to them, and it ends up being a lot of money — $20 on this, $25 on that, and $30 on this, and pretty soon it’s thousands of dollars every year.”
It’s an issue that knows no age limitations. “For younger people, the strategies are different because they’re in the saving mode and the spending mode; they might have young children,” Grenier said. “We know their expenses are going to be high, so we come up with a spending plan that suits their needs.”
Similarly, “if I have an older couple who are going to be retiring within the next few years, we’re going to try to find out what their expense needs are going to be and the sources of revenue coming in,” she explained. “If we can cover their fixed expenses, that’s strategy number one; then the rest of the money is gravy, the icing on the cake that allows them to keep up with inflation, allows them to do all those extra things, allows them to have peace of mind if the market drops, so they don’t have to panic.”
Still, the crash of 2008 has changed many experts’ minds about how to build an emergency fund. “Before the crash, we said, ‘make sure you have six months of living expenses.’ Now it’s one year, maybe two years of living expenses in investments they can easily get their hands on.”
Working for a Living
While younger professionals are still mapping out a career path, Wheat said, many older workers are realizing they’re going to have to work longer than they expected, and not just because of the impact 2008 had on many people’s savings.
“Over the past three or four years, Social Security has placed an incentive for people to delay accessing their Social Security benefits, keeping people in the workforce longer,” he said, noting that the traditional average retirement age of around 62-65 has slowly risen to around 65-67. “The fact is, people are living longer — 20 to 30 years after retirement.”
And, in many cases, Grenier said, “they’re outliving their money. It’s tough.”
Even the best-laid plans, for both younger and older investors, aren’t foolproof, which is why it’s important to continually reassess one’s goals and strategies, she added. “Planning is a dynamic process, and you have to make adjustments as life goes on, because life events happen. If you start early, you’ll have more options as to how to get there.”
Wheat said people often become overwhelmed by the prospect of changing course in their wealth-building plans, when actually making a change may not be so difficult. “Taking a half-hour or hour to make small changes can make a big difference.”
Fortunately, said Keady, whose group specializes in higher-net-worth individuals, today’s investors tend to be very engaged. “Clients are much more sophisticated and demanding. They want a comprehensive plan as they accumulate wealth. They expect more out of us than just investment advice. So we’ve got to adapt to changing client demands.”
Those demands, Grenier noted, are much easier to meet when clients start young, so they’re able to ride the inevitable ups and downs of the markets and take a long-term view.
“They can take more risks and look at alternative investments,” she said. “It’s exciting to me to see the younger people becoming more engaged.”
Joseph Bednar can be reached at [email protected]