Young professionals have a multitude of things to worry about — paying rent, paying for cable, paying for food and trying to find ways to have at least a little semblance of life
But what most young professionals forget about is the life after their career is over. Yes, one day the pain of working will come to an end and you will have to live life without waking up early to go to a cubicle or a job. As comfortable as that sounds, this retired lifestyle is directly dependent on how you save during your formative young years of employ.
So to help all the quarter lifers out enjoy a happy and comfortable retirement we sat down with Chris McDermott, the Senior Vice President of Retirement and Financial Planning at Fidelity Investments to see how we can get you all started on the right foot.
1.) Say, for example, a 22-year-old gets his first job out of college and starts saving $200 per month. Where should that 22-year old start saving that money? Should it be in a savings account that is high yield or another savings option?
We get this question all the time Everyone is different but typically if your 22 year old has access to a workplace plan (401k or 403b plan) at their employer they should be taking advantage of those benefits and the tax-advantaged savings those plans offer. We recognize that people have multiple savings goals – paying off debt (credit cards, student loans, etc.) but saving for retirement needs to be a priority early to be ready for retirement.
To help investors determine an appropriate savings strategy, Fidelity offers a Savings Planner at www.fidelity.com/savingsplanner. The Fidelity planner provides guidance to users on where to save their next dollar juggling competing financial priorities.
2.) If they work for a company that offers a 401(k) should you jump on immediately? If they match up to a certain percentage, should you save that percentage to get the most out of the program or should you only put in a portion. What is the lowest (safe) percentage that you should put into your account?
We believe you should take advantage of a company matching program offered through your workplace plan (401k, 403b plan, etc.) Saving for retirement early in your working career can significantly increase your retirement readiness — being able to retire when you want and realize the lifestyle in retirement you feel is appropriate and you deserve. Early savings in tax advantaged accounts like a 401k or IRA can help tremendously.
It’s hard to determine a single percentage to allocate to your 401k as every individual’s needs and options are different. As mentioned above — understanding your workplace plan and making sure you are at least taking advantage of the matching program is important. After that you should continuing to save based on your ability and overall financial situation.
3.) How should you break up the stock options in your 401k? Is anything safer than the rest?
This all depends on your individual risk tolerance. You also need to decide how hands-on you want to be in the investment decision making process. Fidelity offers a sweet of target date funds that are designed to shift allocation over time to become more conservative as the individual nears retirement.
4.) 401K vs. IRA, which one should a 22-year-old get? Which one would be the most profitable in the long run? Which one has the greatest benefit?
Both of these accounts are tax-advantaged — typically offering tax-deferred growth of both your contributions and earnings. As discussed above the workplace plan (401k, 403b, etc.) often offers an added incentive — an employer match which is a great benefit to take advantage of within your employer plan. In addition, workplace plans offer payroll deductions which often provide a consistent and more disciplined approach to savings a certain percentage each pay period. For these reasons we typically suggest saving money in a workplace plan (401(k) account) prior to contributing to an IRA.
5.) Should 401K funds be accessed in case of emergencies? Is that ever an option? If so what are the penalties for doing so?
Typically we suggest you should look at a 401k loan as a last resort because of the penalties if you fail to pay it back. Borrowing from your 401k has risks you need to be aware of — a couple to consider:
- Penalties. If you fail to make your payments, your outstanding balance and any accrued interest may be treated as a distribution. That’s going to cost you, big time. Distributions from a 401(k) or 403(b) are taxed as ordinary income, plus if you are under age 59½ you may get hit with a 10% early withdrawal penalty. For a person in the 25% tax bracket, that could mean a $3,500 tax bill on a $10,000 loan.
- An early due date. There is another risk to a workplace loan that you won’t find in the private market. If you leave your job or you are laid off, many plans require complete repayment of the loan within 60 days or else it is viewed as a distribution. Again, that may come with a hefty tax bill and penalty. If you were to lose your job and didn’t have the cash to cover the debt, you could find yourself with reduced income, a big tax bill, and a depleted retirement account.
More generally, an individual needs to look at all of their borrowing options - relatives, banks, credit cards, as well as your retirement savings plan (401k). After understanding the terms (costs and risks) pursue the option that makes the most sense for you and your situation. A 401k loan can make sense for some individuals that have limited options outside of their retirement plan to borrow money.
6.) Should a quarter-lifer avoid credit cards or lines of credit?
As long as they are used responsibly, credits cards or lines of credit can be useful personal finance (cash management) tools. If you are using credit cards for day-to-day expenses you need to pay off the card balance promptly each month to avoid penalties or high interest charges. If you find yourself carrying over high amounts of credit card debt each month at higher interest rates you need a formal and disciplined play to pay that off as quickly as possible.
7.) Is the stock market portfolio an option for someone this young?
We believe that an individual with a medium to long-term timeframe (2+ years) for their investments should have money in the stock market to help increase the probability that their investments will keep pace with long-term inflation and realize long-term investment growth.
Typically younger investors will access the stock market through their retirement plan (401k, 403b) at their employer. A 20 year old investor, savings for retirement, with 30-40years until they plan to access this money at retirement, should generally have the majority of those investments invested in the stock market (US and International markets) versus bonds or cash.
8.) What are the benefits of going through a company like Fidelity? What do you do different than your competitors?
For 65 years, Fidelity has maintained a commitment to helping individuals meet their financial goals. During this time we have helped more Americans plan for retirement than anyone else. Fidelity’s investment management, research capabilities and customer service are world-class.
Our offering includes: 1.) Guidance and research to get you the insight and information you need to invest with confidence; 2.) Great value with lower costs to help your money go further; 3.) A broad range of investment choices for any of your financial goal s; 4.) Exceptional service with 24/7 support to help you every step of the way.
9.) If our readers are interested in any of the above, how could they get in contact with you?
They can always visit us at www.fidelity.com or call 1-800-FIDELITY if they have any questions. In addition if they are interested in Fidelity’s perspective on the markets, economy or key personal finance content they can subscribe to our weekly email at https://scs.fidelity.com/other/offers/registration_pubhub.shtml.
Many thanks to Chris McDermott and John Edison at Fidelity Investments for their time and advice.