5 Ways to ‘Ruin’ Your Retirement Security

As banks scramble to understand the needs of Millennials, one thing remains clear: saving early is this generation's silver bullet.

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Baby boomers don’t like to hear it, but our kids—Millennials—are fast coming into focus in the financial world. Boomers still have the money, and retirement readiness for this generation will be a huge issue for years. But the future has come of age, and banks are trying to understand it.

Bank of America Merrill Lynch is rethinking its entire retail client strategy, suiting it to the needs of extended families. The main idea is to appeal to boomers now, but also to transition to the even larger generation of boomer kids in time. In October, Citibank launched a reverse mentor program, bringing in college students to teach senior bankers how they might better use social media and digital technologies. Just about everyone is exploring mobile banking, which Millennials embrace.

But while bankers are still trying to figure out this generation some things are crystal clear, like the need for young people to start saving early and never stop. You don’t need an app to understand that much is working against the future retirement security of Millennials: a lackluster job market, a decade or more of projected slow economic growth that will curb opportunities, diminished pensions. But young people have a silver bullet: time.

By starting early—and the evidence suggests that many twentysomethings are doing just that—Millennials can cut through a lot of headwind. Ten extra years of normal saving could be the difference between $1 million and $2 million at age 70.

BlackRock, one of the world’s largest asset managers, is among the financial firms thinking about Millennials. In his blog, Chip Castille, head of the U.S. and Canada Defined Contribution Group, offers young people five ways “to ruin your future.” His point, of course, is that youngsters will want to do the exact opposite.

  • Opt out Large employers have widely embraced automatic enrollment of new employees into their 401(k) plan. You must opt out to avoid participating. To ruin your financial future, make sure you not only opt out of your plan but, if participation is mandatory, reduce your contribution to the bare minimum. Some plans automatically increase your contribution each year. You must remain vigilant and reduce your contribution annually.
  • Refuse free money Your employer likely offers you free money in your 401(k) plan in the form of a matching contribution. Typically, the more you contribute, the more free money you get up to a maximum of 3% to 5% of annual pay. Not taking the time to figure out how to maximize the employer match is a great way to undermine your future.
  • Ignore time-tested advice There are no guarantees in investing. But there are guidelines to long-term success, such as taking on more risk (tilt toward growth stocks) and being persistent in your saving and investing when you are young, and being more conservative (dividend stocks and fixed income) as you near retirement. Ignore these guidelines to add exciting uncertainty to your financial future.
  • Make your 401(k) your fun bank Despite your best efforts to ruin your financial future, you might find that somehow you have managed to save a decent amount in your employer-sponsored plan. Don’t worry. You can borrow from that account to vacation in Hawaii and miss out on years of tax-deferred growth while you repay the loan. Better yet, you can switch jobs and never repay the loan, triggering taxes and penalties.
  • Tell yourself you have time Delaying saving is one of the surest ways to ruin your future. The power of compounding is such that if you begin to save at age 25 and stop at age 35, you wind up with more money in 40 years than someone who didn’t begin saving (at the same rate and return) until age 35 and never stopped. If you start at 25 and never stop, you wind up with double the nest egg of the person who delayed to age 35. So it makes absolutely no sense to start early—if the goal is to ruin your financial future.