A 25-year-old who diligently saves $200 each month and earns an average of 7 percent interest will accumulate more than $500,000 by the time he or she hits age 65, according to Dave Spano, president and chief executive officer of Elm Grove-based Annex Wealth Management, LLC.
Waiting 10 years to begin saving under the same circumstances will cut that stockpile in half because the saver will benefit less from the effects of compounding interest, judging by Spano’s calculations.
While juggling dollars among debts, routine expenses and splurges can overwhelm a young professional’s budget, saving regularly is a practice they can’t afford to put off, say financial planners like Spano.
“I tell young professionals, ‘Believe it or not, one day you’ll be older, too, and you will be happy that you’ve been saving,'” Spano said.
But the struggle to adequately prepare for long-term financial security is a widespread one among members of Generation Y. Only about 18 percent of millennials across the country feel confident that they will have enough money to live comfortably in retirement, according to data from PNC Bank.
For some millennials, that struggle may be partly rooted in how they were raised, Spano said. Individuals brought up in families that tended to place priority on expensive purchases over saving may fall into the same unsustainable habits.
“You’re a product of your environment,” Spano said.
The struggle to save is compounded by the fact that people are simply living longer. Today’s mortality tables extend to age 120, a clear indicator that millennials need to consider the potential of their own longevity when plotting out how much and how often to save.
“It’s this crazy kind of paradox that…we’re going to live longer, but we better start saving sooner,” said Bill Taylor, vice president of financial planning and sales support at Milwaukee-based Northwestern Mutual Life Insurance Co.
And without the cushion of defined benefit pension plans, most millennials must take charge of their own long-term saving.
“No one is going to do it for you anymore,” Taylor said.
At both Northwestern Mutual and Annex Wealth Management, financial planners’ first steps in assisting young clients focus on sketching out their budget with particular attention on student debt, credit card debt, earnings and spending.
“We really want to take a good, kind of forensic analysis of where your money is going,” Taylor said. “And everybody’s essentials are kind of negotiable.”
Sketching out short- and long-term goals is equally important, Taylor said, to “start with the end in mind and then … walk that back.”
At Annex, financial planners create a balance and income statement for each client after asking them a series of questions about their financial goals, priorities, and means of saving and investing.
“Once we have all of that risk tolerance, time horizon and investment information, then we begin to make recommendations,” Spano said. “That information gives us our financial roadmap.”
When looking specifically at savings options, both Taylor and Spano recommend young professionals save funds among three distinct avenues.
One stockpile should act as an emergency fund with six months’ worth of salary – or at a very minimum two months’ worth of funds – that could support an individual through anything from losing a car to losing a job. This kind of rainy day fund can be facilitated through bank products, such as CDs, money markets and checking accounts, Spano said.
The other sets of reserves should focus on retirement and longer-term ventures. In addition to taking advantage of their employer’s 401(k) plan and ensuring they invest up to what their employer will match, it’s important for young professionals to begin saving for the long term outside the workplace. Since employees cannot tap into their 401(k) funds until age 59½ without facing penalties, setting up an alternative pool of savings provides them a more accessible security measure.
To give millennials a compass for saving, Northwestern Mutual last September launched a collection of interactive tools under www.themintgrad.org. Through the website, young professionals can create a customized savings plan based on their earnings, budget and savings goals.
“It’s really looking at young millennials – young professionals – and giving them a resource that can help them move from financial dependence to financial independence,” said Jean Towell, manager of the website.
For individuals that need to back up and more clearly outline their personal budgets, the website offers a budget worksheet that organizes the allocation of their funds. A supplementary tool called the “budget busters tool” helps millennials identify hidden and unexpected expenses and learn how to manage those expenses within the framework of their budget.
Additional website resources include a lifespan calculator that helps individuals understand how long they might live based on their lifestyle and a debt calculator that can predict the amount of time and funds needed to pay off specific loans.
The tone, topics and interactive tools presented by themintgrad.org were designed specifically to resonate with millennials and mitigate some of the intimidation and uncertainty they may feel about financial planning and lifestyle decision-making.
The premise of the site is to empower millennials to develop strong financial habits essential to their wellbeing, as well as empower college students and recent graduates to carve a path toward financial independence, Towell said.
“If you start early on, you’re going to have a higher likelihood of success or higher likelihood of financial independence over time,” she said.
