Question: What Age Can New College Grads Expect To Retire?
Answer: In what is sure to lead to many groans in the classroom: 75, according to recent report from NerdWallet
This is sure to be a good hook to get students to sit up and recognize the importance of saving while young. Here are a few questions that you can pose to students as the read the report:
What are the primary drivers that will not allow recent grads to retire sooner?
Answer: The study cites three reasons: student debt, rising rents and aversion to investing in the stock market.
The study cites student debt costing college grads over $684,000 over a 50 year period. Can you replicate the math they used to reach this conclusion?
Answer: Asterisk at bottom of chart: If student loan payments were invested over 10 years at 6% return, compounded to age 75.
What percentage of assets do millenials hold in cash? Is that a good or bad thing?
Answer: From study: “According to research from State Street, millennials have an average of 40%  of their saved money in cash: checking and savings accounts, and term deposits such as CDs. Whether this is good or bad, well that depends. If you have short term cash needs (e.g. down payment on car or home), it makes sense to hold those funds in cash rather than invest in the markets.
What impact does saving more when you are young have on your expected retirement date?
From the study:
The study offers four actions that young people can take to shorten their time to retirement. Which of the four makes the most sense to you?
From the study:
- Living at home pays off: One big way to save is by living at home after graduation. By NerdWallet’s calculations, those who live at home until age 25 could be rewarded with a retirement that comes five years earlier, at age 70.
- Maximizing employer’s matching dollars makes sense: Savers should first contribute enough to their 401(k) to grab all matching dollars offered by their employer, then direct contributions to a Roth or traditional IRA, which generally has lower expenses and a wider range of investment options. (Here’s NerdWallet’s list of best IRA account providers.) If they’re able to max out the IRA, then they should go back to making 401(k) contributions until its annual limit is reached.
- Appropriate asset allocation is key: NerdWallet recommends an emergency fund of three to six months’ worth of living expenses. Once that fund is established, an investment portfolio with 40% cash will not provide the kind of return that most people in this age group need to meet their retirement goals. And with retirement a long way off, new graduates can tolerate the ups and downs of the stock market. Most experts would suggest that a 23-year-old invest 80% to 90% of retirement funds in a well-diversified stock portfolio.
- Help is available: Many people would benefit from working with a financial advisor to develop a plan to save for retirement; however, that option isn’t in the budget of many millennials. Consumers can always manage their own portfolios and avoid management fees. For those who want a more hands-off approach, robo-advisors are an inexpensive way to get professional investment management. These services manage investor portfolios through computer algorithms, at a fraction of what a human financial advisor might charge.
Check out NGPF’s newest lesson: Investing for Retirement
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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