Tom: Are there any other factors?
Mellody: Yes, one other significant piece of the puzzle is risk aversion among young workers. Many new graduates and younger Americans saw the damage that the 2008 downturn did to the retirement portfolios of their parents and grandparents, and as a result they have kept more of their assets in cash. Now, that may seem like a smart thing to do, but it really is not. The market, and most people’s portfolios, returned to pre-downturn levels in under 3 years, and the market has seen a long bull market since. Again, because young workers have kept more of their money in cash and out of stocks, they have missed out on this growth in the long term.
Tom: How do young workers prepare for retirement now?
Mellody: My first piece of advice is one you have heard me give people before: put as much money as you can in your 401k, especially if your employer will match it. If you don’t have access to an employer sponsored plan, look into an individual retirement account (IRA). It is especially important for young people to invest early, because what you invest now will be able to compound for a very long time. As I said, the study found that many young people are keeping money in cash, and that is a bad idea. Not only is it not growing, it is also much easier to spend, which is not what you want.
Secondly, work to cut down on your expenses. While you may not want to move in with your parents after college, or have roommates, just doing this for 3 years can allow you to pay down your student loans and cut back on housing costs, allowing you to get a jump on your retirement. The same is true for being frugal when it comes to eating out, or going on expensive vacations. Every dollar you put away now will mean many, many more in 40 years, and can put you on track to retiring in 40 years, rather than 55 years.
Tom: Thanks for joining us this morning, Mellody. We are looking forward to hearing more next week!
Mellody: I will be here, Tom!
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Money Mondays: Should Recent College Grads Be Saving For Retirement? was originally published on blackamericaweb.com