While the kids are back home: 5 retirement-saving lessons for 20-somethings

By Kelly Greene, TIAA Sr. Director and co-author of New York Times bestseller The Wall Street Journal Complete Retirement Guidebook

In many families, college-age children have had the financial rug pulled out from under them and are back home, sheltering in place with their families.

All the experts tell us our children are watching how we handle pandemic anxiety. Well, the same goes for our reactions to watching our retirement savings tank.

So, it's time to take a look in the mirror: Do you look at your 401(k) balance every day? Do you worry out loud about how you will afford to retire? Worse yet, do you talk about how pointless saving feels when the market is so volatile? Odds are your kids are listening—especially while we are all cooped up together.

Those "kids" are attempting to launch their own careers. They may soon be making their first retirement-saving choices. Why not leverage this time of togetherness to share what we wish we'd known back then:

  1. Yes, you should start saving for retirement while you're still paying off debt.
    Practically everyone who has run up a credit card or has student loans to pay off has wondered about this conundrum: Is it better to start contributing to a retirement plan at work right away, or pay your debt off first? It's typically best to go ahead and get started saving. Here's why: First, when you contribute pre-tax dollars to your 401(k) or 403(b) account, you may be surprised at what little impact it has on your take-home pay. Second, many employers will matchOpens in a new window a portion of your contributions. The amounts vary, but a typical formula is something like 50% of your first 6% of pay. So, if you don't put in your share, you could be leaving money on the table. And the earlier you start, the more you can harness the power of compound interest. Compounding happens when earnings on your savings are reinvested. They in turn generate their own earnings, and so on. Over decades, compounding can add a lot of fuel to the growth of your savings.
  2. Make a plan based on your own risk tolerance.
    If you're hand-wringing at home right now about your own retirement, you may have eroded your children's risk tolerance to levels that are unreasonable for their age. You could help them gauge their comfort "investment risk" with one of the many questionnairesOpens in a new window available online. Can you handle a big drop in your account value, even knowing you won't need it for decades? Or will you lose sleep at night anyway? You have to know what you can tolerate so you don't wind up moving all your savings to cash after they've taken a hit. Also make sure your kids ask their employer if they get retirement planning advice as one of their benefits. It's often overlooked, and creating a financial plan early on provides a great way to start setting your long-term goals—and then keep them in sight when deciding how to spend the first paychecks.
  3. Learn the essential term that can help you keep going—"dollar-cost averaging."
    If you're talking about "getting out of the market," you're modeling the market-timing behavior you wouldn't want your kids to copy. Instead, introduce them to the concept of dollar-cost averaging: Investing a set amount at regular intervals with no regard to market swings. That means you may be buying when prices are high and low. And the lower the cost to invest, the more value you're getting. This is what we typically do with workplace plans, where contributions are deducted from paychecks. It's useful when you're investing for the long-term, because you're not trying to time the market. Still, it's important to know that dollar-cost averaging can't guarantee you a profit or protect you against losses.
  4. You probably won't get a pension, but there are other ways to save for guaranteed lifetime income.
    Many people in your kids' age group still assume they will somehow get a pension like their grandparents did—even though most employers are phasing them out. Instead, some employers offer fixed or variable annuities as investment options in their retirement savings plans. And others are adding annuities as one piece of the investments they automatically select for employees who don't make their own choices. It's important to understand that annuities are the only investment option available in retirement plans that can provide guaranteed income for life in retirement. They can also help investors feel more secure when markets fall. Consider this common rule of thumb: Put a portion equal to half your age into this type of investment. So, for example, if you're 22, you might consider saving 11 percent of your retirement contributions in an annuity.
  5. If at all possible, don't treat your retirement accounts like a piggy bank.
    One last lesson: Retirement plans are intended for just that--retirement. You're robbing your future self if you use those savings ahead of time, and also showing your children what you most want them not to do. The recently enacted CARES Act can ease access to hardship withdrawals or loans from retirement accounts, if you're facing COVID-19-related income losses or bills, when employers agree. If at all possible, consider these alternatives first: Using emergency savings, lowering your retirement-plan savings rate temporarily if you are contributing above the match, or pausing college savings. If you still need to tap a workplace plan, consider a hardship withdrawal before a loan, because you can pay the money back within three years—and you don't owe it all at once if you lose your job, as you typically would with a loan.

You may have other lessons you picked up along the way that you want to share with your kids as well. Did you buy high and sell low, and later regret it? It's human nature to want to hear about our parents' mistakes, and it might open the doors to better conversations. However you get them interested, your kids are watching you saving for retirement, and that could leave a lasting impression.

Now, with everyone still back home, you can move on to bigger problems: How to share the Wi-Fi.

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This material is for informational or educational purposes only and does not constitute investment advice under ERISA. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor's own objectives and circumstances.

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