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Why Every Generation Needs to Plan Early for Retirement


Young Americans are starting their careers later than past generations.

They also have much greater debt burdens than those past generations.

These two strikes against them put them behind earlier generations in the retirement derby.

Boomers are not given a pass on the need to plan.

It's Never Too Early For Millennials and Boomers To Plan For Their Retirement

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Please share your story in the comment section, of when you began to invest and if you made regular contributions to your retirement investing plan in your retirement investment accounts

Most young folks give no thought whatsoever to saving for retirement. When they've finally landed a job, their first thought is to get out of their parents' basement to go out on their own and begin enjoying the perks of an independent life.

After moving into their own digs, they're focused on doing up the place, buying some furniture, plates and flatware to eat more ramen noodles and get on with their new lives.

Consumption will include lots of eating out with friends, visiting all the night hot-spots, consuming alcohol, and perhaps buying a new set of wheels for transportation to that new job, not to mention monthly expenditures for utilities, gas, phone, T.V., Internet bills and food that mom and dad used to pay on their behalf.

These new sets of ongoing monthly expenditures, not to mention taxes deducted from those shiny new pay checks, will take up a large portion of their new earnings.

Saving and investing for a retirement some 40 years off, for most of them, is the furthest thing from their minds. Who's got the time and energy to think about such mundane and boring things when life is finally becoming pretty exciting?

Then there's the enormous college debt that constitutes a huge burden for many of them.

How Bad Is The Student Debt Problem?

In 2016, Americans are more burdened by student loan debt than ever.

You've probably heard the statistics: Americans owe nearly $1.3 trillion in student loan debt, spread out among about 44 million borrowers. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year.

But how does this break down at a more granular level? Let's take a look.

General Student Loan Debt Facts

First, let's start with a general picture of the student loan debt landscape. The most recent reports indicate there is:

  • $1.26 trillion in total U.S. student loan debt
  • 44.2 million Americans with student loan debt
  • Student loan delinquency rate of 11.1%
  • Average monthly student loan payment (for a borrower aged 20 to 30 years): $351
  • Median monthly student loan payment (for a borrower aged 20 to 30 years): $203

The average debt load for a 2016 college graduate Millennial is on the order of $37,172 today, which can cost them about $351 per month for the average monthly payment. Add this debt burden to other debt like an auto loan or mortgage on a first house and we get an idea of the kind of obstacles these young people are facing today.

One of the first tenets of retirement investing speaks to the benefit of starting to plan and invest as early as possible to gain the benefits of compounding returns over the years.

Here's an example of the possible returns that can come from early planning and investing:

40 years of saving, beginning with $1000, with $1000 monthly additions, earning 8%

The expression, "The early bird gets the worm," takes on extraordinary significance when we see what an early start, giving us 40 years to invest $1000 monthly can bring us. Who needs a gold watch at retirement when you can look at the accumulation that comes from this early start.

This investor grew his regular monthly investments, assuming a combined capital and dividend growth rate of 8%, to a tidy sum of $3,515,281. This consists of his principal investment, which totaled $480,000 over 40 years, plus his return of $3,034,281 over this period.

The yellow bars clearly illustrate the accumulation of those monthly $1000 investments, and the green bars demonstrate the much larger contribution that comes from compounding the returns from dividend growth and capital appreciation.

Compound return charts, courtesy of

For comparison, here's what might be expected from starting out five years later.

35 years of saving, beginning with $1000, with $1000 monthly additions, earning 8%

Beginning the retirement investing journey five years later brings demonstrably smaller results. The chart shows us that with the same starting amount and exactly the same monthly additions of $1000 per month, losing out on just five years of compounding brings a final balance to this investor of just $2,310,175. His investments of $60,000 less over those five years results in a final balance that is $1,205,106 less than the early bird.

Though the overall numbers become smaller with a later start, you can still see the much larger contribution that comes from the compounded returns in comparison to the monthly investments in the above chart.

Here's what might happen if investing started that much later, with smaller amounts that a millennial might have to invest, and at a lower rate of return going forward, projected by many analysts today.

32 years of saving, beginning with $500 with $500 monthly additions, earning 5%

The above chart clearly shows the effects and penalties that may occur to the millennial that begins investing eight years later than his boomer parents did. It also reflects the effects of investing only half as much as her parents might have, and earning only 5% returns going forward, compared to the 8% her parents were able to earn.

After contributing just $192,000 over those 32 years, her final retirement balance grows to just $474,860. This amount is fully $ 3,040,421 less than her parents might have accumulated given the assumptions posited above.

The above chart graphically illustrates that the relative distribution of investment contributions to compound returns gravitates closer to half coming from each. That is a wide disparity to the ratios we saw from the other scenarios and it clearly points to the huge importance of compounding of returns, over longer periods of time. This cannot be emphasized enough.

So, it is pretty clear that starting early on the retirement planning journey is much more advantageous than starting later, or too late. The later one begins, the higher the hurdles to a good result that would be strong enough to support a safe and comfortable retirement.

So, the millennial that starts down the road to investing five to eight years after earlier generations is quite disadvantaged from the get-go.

That much higher debt burden compared to earlier generations puts yet another roadblock in the way of the Millennials. Having less disposable income to devote to retirement savings, even if they were pre-disposed to wanting to start, puts them at yet another great disadvantage.

We saw what their parents, the boomers, might have been able to save over a 40-year retirement savings period, devoting perhaps $1000 per month to this endeavor, earning 8% annually, compounded.

Starting 8 years later than their parents, able to save only $500 per month, and earning a smaller 5% return that many analysts believe may be achievable over the next 32 years, we see a vastly different outcome.

Three Large Impediments

The three large impediments that come from starting late, saving less, and earning less on those savings are responsible for an increasingly bleak outlook for the Millennials.

There's not much point, and nothing to gain from young folks placing blame and crying in what beer they can still afford.

Sure, several bad cards were dealt to them

  • Hugely inflated college tuition and room and board costs.
  • College degrees that did not bring expected payoffs in terms of sought after positions or expected high levels of compensation.
  • High debt burdens associated with these inflated costs.
  • Graduating into the teeth of the worst recession since the Great Depression.
  • Corporations slashing employment rolls for years, leaving no room for new hires.
  • The slowest recovery since World War II, facing Millennials with a very slow jobs recovery.
  • Continued out-sourcing of jobs and production to cheaper global areas, further depriving Millennials of job opportunities.
  • The globalization of trade, forcing Millennials to compete against each other for a shrinking number of higher paying positions in the U.S.
  • College educated Millennials forced to take low-paying jobs in retail, hospitality and food service industries, making it that much harder to move out of mom's basement, pay back college debt and become healthy participants and consumers in an economy, as weak as it has been.

How To Get Out From Behind The Eight Ball

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