True Story: How Young People Can Lock Up Financial Security in 5 Years

A report from T. Rowe Price argues that the first few years out of school are critical in reaching long-term financial security. Starting saving early is so important that you can virtually lock up retirement security by age 30 if you take these four steps

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You’ve heard it many times: starting young is the key to saving for a comfortable retirement. But is it really possible to lock up long-term financial security your first five years out of school? That’s the audacious suggestion in A Road Map to Financial Security for Young Adults, a report from mutual-fund company T. Rowe Price.

“Young investors can accomplish a lot in just three to five years,” Stuart Ritter, senior financial planner, says in the report. “Financial security is not necessarily a 20-year endeavor.”

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The mistake young people make is that they see financial security as a long process, which leads to procrastination, Ritter says. But small steps early in adulthood can lead to big results over time. T. Rowe Price lists four primary financial priorities for those starting out:

• Save 15% of salary for retirement

• Get the right health insurance and renter’s or homeowner’s insurance

• Pay off high-interest debt like credit cards

• Build an emergency fund to cover three to six months of living expenses

The report looks at typical finances of a college graduate earning $35,000 a year and shows how this graduate can save for retirement, maintain insurance, build an emergency fund over three years and pay off student debt of $25,000 while amassing $87,000 of savings over 10 years. According to the report:

“The biggest obstacle for those starting out is not financial, but psychological: they have to make a significant mental shift to right-size their expectations and perhaps their level of patience … Many try to replicate, in just a few years, the lifestyle it took their parents a lifetime to achieve. They may be used to having a high-speed Internet connection, cable TV, smart phones, annual vacations, one car per driver and so on.”

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There is some evidence that young adults get it. A recent TD Ameritrade survey found that both Generations X and Y, on average, began saving for retirement nearly 10 years earlier than boomers, who started saving at age 35. That time advantage is huge. To reach a goal of, say, $1 million, you’d need to save about $4,700 a year over 40 years. But over just 30 years, you’d need to save twice as much each year. Find your own cost of delayed saving with this calculator.

Retirement saving and insurance are lifelong costs, T. Rowe Price acknowledges. But paying off debt and setting up an emergency fund can be dealt with fairly quickly. Then you’ll have greater ability to focus on long-term goals. Meanwhile, by starting to save early, you won’t have to save so much later on. That’s the basic argument for locking up long-term financial security your first five years out of school. You won’t actually have achieved it. But you will be on a steady, sustainable path.