'Road To Retirement' Starts In Your 20s

Thanks to shrinking pensions and a cost of living that never seems to stop rising, it takes more money than ever to retire comfortably.

So, The Early Show's money maven, Ray Martin, kicked off a three-part series Thursday called "Road to Retirement."

Each day, he will address a different generation of workers, telling how much they need to be saving, and how to do it. He'll address specific challenges facing each age group.

Unfortunately, says Martin, many young workers aren't as concerned about retirement as they should be, thinking they're too young to be putting money aside for it.

In fact, only 31 percent of young workers who are eligible to join a 401(k) plan do so.

That, says Martin, is a huge mistake. If anything, the 20s is the stage of life when it's best to start saving for retirement, because the money has so long to grow. A relatively small investment can yield big results down the road.

For instance: Say you are 25 and you earn $30,000 this year. You manage to save 10 percent, or $3,000, of that income. By the time you reach 65, that $3,000 will have grown to $160,000, figuring a 10 percent growth rate, the average long-term growth clip of the stock market. Thanks to inflation, $160,000 won't have the same spending power in 40 years it does today, but think about it: If you can earn that kind of money after saving for one year, what can you amass if you continue to save throughout your career? The key is to get started now.

There are three keys, Martin stresses:

SIGN UP FOR YOUR 401(k)

The most important thing to find out when you join is how much you must contribute in order to receive the maximum contribution from your employer. Most employers will require you to contribute at least 6 percent of your pre-tax pay to get a 3 percent employer-matching contribution. If you are not eligible to join a 401(k), your employer does not offer one, or you work for yourself, you can still be saving for retirement. Check into a self-employed 401(k) or an IRA.

CONTRIBUTE 10 PERCENT

Most experts say that if average workers are employed and saving for retirement for more than 30 years, and all they have is their 401(k) and Social Security, they'll will need to contribute 13 percent to 15 percent of your pay each year into your 401(k) to have a reasonable chance of having enough money to pay for your retirement. So, if your employer contributes 3 percent, and you contribute 10 percent, the total contribution would be 13 percent.

Most college grads aren't earning big bucks, and even if they are, they feel burdened by student loans and credit card debt. Many twenty-somethings would probably laugh out loud at the thought of saving 10 percent of their income.

How do you juggle retirement savings and loan repayment?

Student loans should never come between you and retirement. Consolidate your loans into a single low payment with a low interest rate and don't rush to pay it off early.

If you have credit card debt, however, it's another story. Interest on this debt is probably high, and you need to get rid of it ASAP. Put just enough into your 401(k) so you can get your employer's matching contribution.

If you feel like you just can't save 10 percent right now, you still need to contribute enough so you can get the matching money from your employer. Then, each time you get a raise, increase your contribution, until you reach the 10 percent mark.

INVEST IN STOCKS

Believe it or not, younger employees today tend to invest more conservatively than their parents!

Martin recommends investing 90 percent of a 401(k) in stocks, 5 percent in cash and 5 percent in bonds.

If you look at the performance of the financial markets between 1956 through 2005, a 100 percent stock allocation generated an average annual return of 10.4 percent, but a 60 percent stock and 40 percent bond allocation generated a return of 9.1 percent. While this may not sound like a lot, over time this can make a huge difference in the amount of money a younger person could have at retirement, Martin says.

So, by the time workers reach age 30, how much should they have saved for retirement?

According to a number of experts and a recently released study by Fidelity Investments, assuming you are looking to retire at age 65 and earn an average income, by the time you are age 30, you should have accumulated 1 to 2 times your annual pay in retirement savings, Martin reports.

On Friday, Martin looks at people in their 30s and 40s.

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[ndg1979]

Here is a thought for America's math teachers and businesses. I will be field testing a new financial experiment and will find ways in the future to provide updates to CBS's Ray Martin and perhaps build a website that will encourage today's children to save.

I will be going to my high school alma mater and suggesting to on eof my old math teachers who I have maintained contact with since leaving school nearly ten years ago that we look for volunteers for this savings experiment.

A chart with names shall be placed in the math class and student volunteers will be required to save X number of dollars during a specified amount of time (probably Jan 01, 2007 to end of school year) with several goal dates before the end of the program. Each time a student meets the goal, my business will provide them a freebie (in this case - a free meal at Arby's).

Should any student complete the savings program, the final incentive will be a set number of free meals all summer long until school starts again. My business generates publicity, establishes itself as a community partner and helps my school's children learn a valuable lesson along the way.

If I can get the whole school district involved, perhaps the prize will be Arby's lunch for the whole school. Any thoughts?

[ndg1979]

I agree with 2cent that it is more difficult to save today than it was 10 years ago. I'm 27 and manage a restaurant with $1.3 million in annual sales, yet make a laughable $24,000 per year. Unless the government and corporations raise wages (insert your laugh here), it will be extremely hard for those in their 20's to put anything aside for life 40 years down the road.

However, on a much different note, you may find it interesting that even with a student loan, car payment and other associated expenses, I am managing to set aside cash for a cross country move from Pennsylvania to Arisona. My goal is $5,000 in twelve months. I am putting aside only $10 per day with a little extra here and there.

My circumstances are much different from yours as I will be staying with a friend and have already arranged immediate employment upon my arrival. After I am settled in my new home, I will begin the process of saving $10 per day all over again until I retire. Assuming I start at age 28 and retire at 65, I will have saved $135,050. Buy placing money in higher-interest yielding savings of various types, I could increase that savings several-fold.

Can this work for you, only you know. My friend has been very supportive to keep me on target and that is making all the difference. Perhaps using a buddy system could be your ticket too.

[heresmy2cent]

I always find these theoretical savings scenarios amusing to read. Certain important details are always left out that are contrary to reality.

a. Most young Americans (actually most Americans) lack the discipline necessary to save ANY money. Our society is programmed to spend, spend, spend--all on credit.
b. The average 25 year old is very likely in debt to the tune of $60K or more just to finance their schooling. Moreover, when you include a car payment, rent, and other necessities how much of that $30,000 (boiled down to around $21,000 after taxes) will available for savings?

The other piece of assine advice is the notion that a typical 25 year old is knowledgable (and lucky) enough to find a competent and trustworthy financial advisor who would be interested in providing investment counsel for a paltry $3000 investment.