Getting someone to start saving early for retirement can be likened to regular flossing. Too often by the time people are convinced about the need to floss, it is because they have started losing teeth.
Saving for retirement is similar in that it often doesn’t seem like a big priority for young people at their first job. And when they are 55 looking at retirement only a decade away, it is a far more difficult task to save enough for retirement.
“I think the problem is it is difficult to get people to think into the future particularly if it costs them something today,” said Dr. Ken Cyree, who holds the Frank R. Day-Mississippi Bankers Association Chair of Banking at the University of Mississippi in Oxford. “You’re talking about human nature and I don’t know the answer. I don’t know that anyone hardly does.”
Starting early can make a huge difference. Cyree gives the example that if you start saving $100 per month at age 22 and that is matched in a 401(k) plan by an employer’s contribution of $100 per month, the investor could retire with approximately $894,000 in savings (assuming a return averaging 8% per month).
“If you wait until you are 55, that same investments is going to yield only $36,000,” Cyree said. “That to me is a powerful illustration. The difference is $36,000 versus $894,000. If you start saving like a normal American at age 55, you have to save about $6,000 per month to have the same amount of money when you retire as if you have saved $100 a month from age 22.
I think showing people the numbers makes a big difference.”
Cyree pitches saving for retirement to college students in his classes, and believes that is especially important because most Americans aren’t adequately prepared for retirement. In fact, on average Americans spend more than they save.
One of the best ways an employer can encourage employees to save is by matching contributions to the 401(k) plan.
“You put in $100 and your employer puts in $100 per month,” Cyree said. “You immediately have a 100% return on your investment. It is a great way to leverage your money and you should take advantage of that as much as possible. If the employer is matching it, participating is absolutely a no brainer.
“It is important to start young and most people don’t. The power of compounding, the way it works, the real bang for your buck comes toward the end. If you earn even 8% interest, you double your money roughly every nine years or so. The last eight years of saving you get a big bang for the buck.”
His advice to college kids is make it a habit from the first, and you won’t miss the money. Put if off and suddenly you are 40 or 50 years old.
“You don’t get those years back,” he said. “Just pull it out first before you get your paycheck and pretend you never had it. If folks will think about it like that, maybe that will help.”
It is a very thorny issue because most people instead of saving for a secure retirement are going more into debt each year. Cyree said there is a current craze in California for reverse mortgages where instead of paying off a mortgage, homeowners receive equity payments on their home each month. Cyree sees living off the savings represented by home equity as a very bad trend.
If trends don’t turn around, many people will have to work longer or drastically cut back on expenses when they reach retirement age.
“It you really want to retire, you need to save,” Cyree said. “And the best time to start is today whether you are young or not.”
Entergy Corp. does a number of things to encourage employees to save. Tricia Geno, director of employee communications and special services for Entergy Corp, said they recently held a 401(k) day. It is a day the company encourages people to really focus on their 401(k) plan to make sure they understand what it is, review their plan, and consider how the plan may need to change as they age.
“Younger investors may want to take riskier investments,” Geno said. “As they get older, they may want more balance between high risk and growth. We have a lot of online tools for employees where they can plug in different amounts of savings and see what that savings would look like in 20 years based on investment options. They can play with it and develop all different kinds of scenarios. We offer the employees a number of different ways to invest their dollars so they are able to control how funds are invested, monitor changes, and make changes on a daily basis if they want to and are really savvy.”
Geno said they emphasize to employees that contributions to the 401(k) are before tax. That is an additional savings benefit in lowering income taxes. Also, the company provides a match of 70¢ per dollar invested by the employee up to 6% of the employee’s salary.
New employees are educated about the 401(k) plan when they first join the company. And the 401(k) savings program is promoted in internal communications.
Most people take advantage of the program. Geno said the company tries to reach out and encourage those who haven’t yet participated.
“The bottom line is it is a personal decision, but we have a very high participation rate,” she said. “Education is the big thing so they understand the benefits of participation.
The 401(k) plan has loan options and different ways to access money without being penalized if you are in circumstances where you really need it. It is just a good tool for anyone who wants to be financially responsible. It is really easy to save because it is taken directly out of the paycheck and you don’t have to take the extra step of making a deposit yourself.”
W.O. Jones, senior vice president, director of human resources, BancorpSouth, said most people who work at a bank don’t need to be convinced about the virtues of saving for retirement.
“In construction or manufacturing, for example, you may have to do a little more selling on the time value of money and compound interest,” Jones said. “But most people working in banking and financial institutions already have that concept. It is not as hard a sell for people who work in the industry. About 85% to 90% of our people participate at some level.”
BancorpSouth gives employees a 100% match on contributions to the 401(k) program up to 5% of the employee’s salary, and provides 18 different investment options. Jones said the employer’s contributions are immediately vested to the employee so the money goes with them even if they quit working at the bank.
Jones said in general the American public keeps “going down that slippery slope of instant gratification.” He doesn’t have an easy solution to the dilemma, but said well-designed 401(k) plans make it as painless as possible for people to be responsible planning for their retirement.
“People who invest in a 401(k) plan aren’t just sitting around to depend on Social Security or someone else to provide all their retirement income,” Jones said.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.