“The 3 Pillars of Saving”
By Lule Demmissie, managing director, investment products and retirement for TD Ameritrade
In Oliver Stone’s “Wall Street 2”, Gordon Gekko looks into the eyes of the Gen Y crowd and says to them, “You are the ninja generation. No income. No job. No assets.” He could have also added, “Too much debt.”
While this may be an exaggeration, it’s an important perspective that should give Gen Y a nudge. According to a recent survey released by TD Ameritrade Holding Corporation (NASDAQ: AMTD), more than half of the Gen Y respondents said that they plan to retire on schedule. Yet, 48 percent are no longer saving, 33 percent have stopped saving for retirement and 27 percent are piling on credit card debt.*
As individuals, we may not be able to control the economy at large, but we can impact our own financial futures by adopting smarter spending and saving habits—habits that can help us handle life’s big events, as well as our eventual retirement (however we define it).
But first, our perceptions have to catch up with reality. Saving does not have to mean that you need to cut out all the things that make you happy. However, it might mean reprioritizing and eliminating those “mindless” spending binges that eat into your pocketbook and don’t necessarily increase your happiness quotient, such as that impulse purchase at the checkout or that expensive designer-wear.
Once you’ve identified opportunities for saving, here are some key strategies to keep in mind when deciding on which types of long-term savings vehicles to consider:
1. Take advantage of tax-deferred savings and non-taxed spending vehicles.
- Employer-sponsored plans such as a 401(k) - an employer-sponsored retirement plan deducts money from your paycheck before taxes—making investing easier. Many employers also offer programs that match your contributions, so take an interest and ask.
- Contribute to your IRA - whether it’s a traditional IRA or a Roth IRA, it’s important to consider putting a layer of savings into these types of accounts. You can contribute up to $5,000 annually, and depending on the type of IRA you pick, it may provide you with tax-deferred growth, tax-deductible contributions and/or distributions that are free from federal income tax.
- Utilize a flex spending or health savings account through your employer if it is offered – qualified health care expenses like your doctor’s visit copay or prescription purchases may be paid for with your pre-taxed compensation. If your employer offers these options, utilizing them may mean more money in your pocket. A good habit may be to deposit those reimbursement checks into your savings account.
2. Consider an additional savings account.
- Why save more? After you’ve taken advantage of the various tax-deferred savings and spending vehicles available to you, you may want to consider a separate savings account to help supplement your long-term financial needs. This can protect you from having to borrow from your 401(k) or tap into your IRA should you face significant or unexpected expenses.
If you have the resources to plan ahead to establish a savings account, you can hopefully avoid costly penalties associated with dipping into your qualified retirement accounts.
3. Develop a financial plan.
- Determine your long-term goals. To help assess your financial situation and develop an action plan to pursue your goals, take advantage of a free calculator like TD Ameritrade’s WealthRuler™, or talk to a financial expert.
And don’t underestimate the power of the compounded growth that tax-deferred investing and savings can have on your portfolio. Here’s an example of what investing just $100 a month can add up to over time:
- If a new grad starts investing $100 per month beginning at age 21, and continues that monthly investment for the next 20 years, stopping at age 41, the total investment before interest is $24,000.
- Assuming an 8 percent annual return compounded monthly, that $24,000 will become $471,358 by the time the grad retires at age 67. Of course, this does not take into account fees, expenses, and taxes, as well as any investment risk that may be associated with an investment assumed to return 8 percent annually.
Starting to save for retirement too late could cost thousands—or even hundreds of thousands—of dollars. By saving just $100 a month, investors can make a big impact with just a small monthly amount, so why not take advantage of compounding and skip that morning latte?
For more information, TD Ameritrade’s Cost of Waiting Calculator and Retirement Center offer tools and resources that can help estimate the cost of delaying retirement savings.
Provided by: TD Ameritrade, Inc., member FINRA/SIPC/NFA, a broker-dealer subsidiary of TD Ameritrade Holding Corporation.
The foregoing is provided for informational purposes only and should not be construed as legal or professional advice. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Past performance of a security does not guarantee future results. All investments are subject to investment risk, including possible loss of the principal invested.
These results are based on a survey conducted by Maritz, Inc. on behalf of TD Ameritrade Holding Corporation. One thousand seven (1,007) adults between 22 and 81 years of age participated in a telephone survey from March 23 through April 11, 2011. The margin of error in this survey is ±3.1 percent. This means that in 19 cases out of 20, survey results based on 1,007 respondents will differ by no more than 3.1 percentage points in either direction from what would have been obtained by seeking the opinions of all adults living in the United States ages 22 through 81. Maritz, Inc. and TD Ameritrade Holding Corporation are separate, unaffiliated companies and are not responsible for each other’s products and services.
Generations defined as: Mature: born 1930-1945; Boomer: born 1946-1964; Gen X: born 1965-1976; and Gen Y: born 1977-1989.