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Let freedom ring in retirement

By Barbara Whelehan · Bankrate.com
Friday, June 28, 2013
Posted: 4 pm ET

Just in time for Independence Day, this week President Barack Obama issued an executive order establishing an advisory council to improve the financial capability of young Americans.

From the executive order:

"To contribute to the nation's future financial stability and increase upward economic mobility, it is the policy of the federal government to promote financial capability among young Americans and encourage building the financial capability of young people at an early stage in schools, families, communities and the workplace. … Having a basic understanding of money management from an early age will make our young people better equipped to tackle more complex financial decisions in their transition to adulthood, when critical decisions about financing higher education and saving for retirement can have lasting consequences for financial security."

It's a noble government initiative, but I wonder how effective it will be. Last year the Government Accountability Office reported that the federal government spent about $68 million on 15 comprehensive financial literacy programs in fiscal year 2010. Since then at least four of those programs "have been defunded," according to the GAO report.

Schools, families, communities and the workplace have a better shot of getting through to young people. And some nonprofits, such as Junior Achievement, make it their business to teach kids how to succeed in the global economy. That particular organization has been around for more than 90 years and is still going strong.

Obstacles to wealth

Notice the executive order focuses on the importance of college financing and retirement planning for young people. A recent Fidelity Investments study found that 70 percent of the class of 2013 is graduating with debt, and the average debt load is $35,200, including all loans and credit card debt. Four out of 10 students would have made different decisions about their college planning if they'd known ahead of time how much college would cost, according to that study.

Such grads are not likely to prioritize saving for retirement because they'll have to spend a large portion of their income to pay down debt.

But they should contribute to their company's 401(k) plan -- at least enough to get the company match -- even if they are in debt. Every day it seems a new retirement survey affirms the terrible shape their parents -- baby boomers -- are in. Last week a lengthy report from the National Institute on Retirement Security titled "The Retirement Savings Crisis: Is it worse than we think?" revealed that more than 38 million working-age households own no retirement account assets whatsoever, based on an analysis of the 2010 Survey of Consumer Finances from the U.S. Federal Reserve. That represents 45 percent of households with earners of ages 25 to 64.

I was scared into investing, after listening to a presentation by two female brokers who warned that those who don't save for retirement will likely live out their old age in poverty. The sooner you start investing, they said, the more you can amass, thanks to the power of compounding earnings. I wish I'd heard that message when I was in my teens or early 20s so I could have acted on it sooner.

Your employer's role

Employers are beginning to grasp the important role they play in preparing workers for retirement. As a result of legislation passed in 2006, the majority of companies that offer 401(k)-type plans automatically enroll their workers into their plans. But the deferral rate is low -- typically 3 percent of pay.

Through their careers, boomers have had to muddle through the investment process on their own. As a result, most 401(k) participants -- 85 percent -- feel they are not saving enough and 6 out of 10 don't think they'll be able to maintain their standard of living when they retire, according to a study released Thursday by Bank of America Merrill Lynch. But things are starting to change.

"Companies are taking financial education and access to professional financial advice more seriously today," says Steve Ulian, managing director, institutional retirement and benefit services for Bank of America Merrill Lynch. "Since the economic downturn, we have seen through this research, and our day-to-day work with companies, that the majority of employers feel a greater responsibility to help employees meet their broader financial goals and needs."

Among workers under age 30, 55 percent contribute more than 5 percent, while just 8 percent contribute 3 percent or less, according to the study. That's encouraging news.

A new white paper by the Defined Contribution Institutional Investment Association recommends employers sets the initial deferral rate at 6 percent, and implement annual increases of 1 percent or 2 percent, up to a cap of 15 percent at minimum. If adopted widely, this would surely help Americans prepare for retirement.

It's also up to you to spread the word. You know some millennials? Implore them to save for retirement, even if they have other financial commitments.

Amassing money gives you options so that if you should find yourself laid off at 55, it might not be a crisis. Or if you discover you don't like your job after toiling 40 years in the same field, you can do something less lucrative but more fun since you will have a cushion.

Building a big nest egg from an early age ultimately gives you freedom. It may not be the type of freedom that our forefathers envisioned when they signed the Declaration of Independence, but it's a worthwhile goal nevertheless.

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