A fun exercise to ask young professionals just starting out their career is to ask them, “If I gave you $10,000 today, what would you do with it?” The majority of responses would focus on discretionary spending, the purchase of “things.” A smaller segment of the sample would admit to using that money to pay down debt and better their personal balance sheet. Even a smaller segment would admit to putting that money to work through investments.
The under 30 age demographic tends to have a misguided philosophy regarding retirement; that overtime they will find themselves in a position to have successful golden years with minimal effort. Unfortunately, that is not the case. If we applied that same model of thinking to other aspects of our lives, we would think that the thought process was ludicrous. Can we run faster without training our bodies? Can we become well read without ever picking up a book? Of course not, and the same tenets hold true for retirement savings.
Many young professionals today take full advantage of employer sponsored retirement plans or independent retirement accounts (IRAs), but those plans alone will likely not be sufficient to fund your retirement. Some individuals believe that they can rely on inheritance or Social Security to provide them with a satisfactory lifestyle after their careers have come to a close. Personally, I would be one to say that they have a better chance of hitting the lottery than Social Security paying out in the long run, the point being that young investors need to step up and take hold of their own financial futures.
We have previously written about just how significant compounding interest can be for your savings. At one point we ran a web ad that showed the math; if you save $20 per week for 50 years at an annual rate of return of 10%, how much money would you have? We are talking $1,040 per year and a total capital investment of $52,000. Given those factors, that account would grow to $1.3 million at the end of the 50 year investment period. When you look at a 20 something year old and tell them that they can become a millionaire if they take charge and invest properly, you can see an immediate shift in their attitudes towards saving.
The most frustrating thing is that our students have little to no exposure to personal finance at a young age. We understand the need for students to learn math, biology, literature and more, but balancing a checkbook and saving for your future are things that literally every single student should graduate high school understanding how to do. Sports Illustrated ran an article in 2009 that became the basis for an ESPN 30 for 30 documentary showing how many athletes face financial hardships after their careers are over. Specifically, 60% of NBA players file for bankruptcy within 5 years out of the league. It is no coincidence that professional athletes face such financial hardships when they go to high schools that do not teach basic personal finance and colleges that are more focused on the revenues that they can generate for the university as a player, not their abilities as students.
Saving is not easy and at times it certainly is not fun. We have found ourselves in a situation where our students are not receiving the proper education and have misconceptions about retirement once they hit the workforce. What it all boils down to is that no one is going to fund your retirement on your behalf; it is an individual responsibility, and for the sake of your future self, own it.