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Generation Y looks far ahead, to retirement

More Generation Y members seek financial advice than people in other generations, a poll shows.istockphoto

When it comes to saving money, Generation Y is asking “why not?”

Young people are discovering that the earlier they start saving for retirement and the longer they work, the larger the nest egg will be. And they are looking for ways to change their savings behavior accordingly.

This is an important lesson for a generation, born between 1979 and 1991, that came into the workforce in the midst of financial turmoil. Now, as the economy improves and unemployment wanes, they will face myriad tax and economic policy changes.

More Generation Y members are seeking advice on finances than in any other generation, according to a survey by Merrill Edge, which found that 84 percent of Gen Y respondets are seeking such advice, compared with 76 percent overall.


“They want to take action,” said Alok Prasad, head of Merrill Edge, the investment management partner of Bank of America Corp.

Eighty-three percent of Gen Y-ers polled are contributing to a 401(k) plan, up 8 percent from 10 years ago, according to Fidelity Investments.

But this is what Generation Y is up against: To maintain a similar standard of living in retirement, they need to save 15 to 20 percent of their annual incomes beginning at age 25, said Christine Fahlund, vice president of
T. Rowe Price investment services.

Generation Y is not achieving perfect success — average contributions are about 4 percent of current salaries, according to T. Rowe Price — but even a little can go a long way. Compounding interest can build even meager savings into a considerable sum. A 25-year-old making $45,000 per year who contributes 4 percent would be likely to save $160,500 by age 50 and $564,000 by 65, T. Rowe Price says. Someone saving 6 percent would save $240,700 by 50 and $846,000 by 65.


That means that the difference in savings would be equivalent to a 50 percent increase in total savings, for only a 2 percent increase in contributions.

Yvonne Reed, 29, began contributing 10 percent of her salary to her 401(k) plan when she started working for a large entertainment company in Orlando in 2007, at age 24.

“My thought was, I have more cash than I need to spend now, so what do I do with it,” Reed said.

Reed used a calculator on Fidelity’s website to work out her daily spending and bills. So far, Reed has saved $50,000 in her 401(k) plan. With her current salary at $70,000, Reed is on track to save between $4 million and $16 million by the time she retires at age 70, according to a contribution calculator on Fidelity’s site.

Reed laughs when she receives e-mails from Fidelity projecting a fund in the multiple millions.

But how young savers allocate their investments is as important as the mere act of saving.

Firms like Merrill Edge and T.Rowe Price offer copious information about how to use their products. A focus on younger investors still takes a backseat to the boomer generation, however.

To address that, companies are offering­ low-cost advice for young investors. For instance, LearnVest, a site focused on educating women, started offering investment advice this year in addition to personal finance tips.

A specialized approach is needed because Generation Y is in a different investment position than their boomer parents, who cannot put money into retirement markets when markets are down. They do not have enough time to recover, advisers say.


But the younger generation seems more concerned about the possible impact of the economy on their savings than the rest of the country. Merrill Edge found that 83 percent of the Gen Y group vocalized this concern, more than the 75 percent national average.

Young adults should not let this concern affect their tolerance for risk, Fahlund said. Gen Y should view down markets in the opposite way: When prices are down, investing returns will be better decades down the line.

Some Gen Y investors have proven adept at taking the long view.

“I am saving for the day when Social­ Security isn’t there,” said Katie Vojtko, 25, who does marketing for a start-up technology company in Pittsburgh. She is putting $5,000 (the maximum) each year in a Roth IRA and plans to start a 401(k). Investing during a down economy spooks her boyfriend, but Vojtko seizes the opportunity. “One day, that money could pay for my kids’ college,” she said.