Financial foresight pays

By Catherine E. Toth
Advertiser Staff Writer

Allison Mizuo of Makiki gets financial advice from Daren Shigeta of Transamerica. Mizuo, 25, says she hopes to retire by age 45. Many twentysomethings are aware of the need for retirement planning. Because of how interest compounds, those who start saving earlier end up with lots more money. Eugene Tanner • The Honolulu Advertiser

For GenXers, that means now.

"For young people, it's crucial," said Darin Shigeta, a 26-year-old certified fund specialist with Transamerica Financial Advisors, who already boasts an enviable diversified portfolio. "It doesn't really matter how much, but just starting something is the more important thing. Fifty bucks a month. Whatever. Just start."

Shigeta is one of a growing number of Xers across the nation who aren't waiting to begin the job of building a sound financial future. No longer are investments in mutual funds and real estate exclusive to established careerists.

Most have started already

And no longer do Xers fit the stereotype of lazy, MTV-watching moochers.

A 1999 retirement survey by the Employee Benefit Research Institute revealed that 23 percent of GenXers have already put away up to $50,000 in retirement savings. Twenty-six percent have saved up to $10,000. Only 11 percent haven't saved a penny for retirement.

"In general, there's more information out there that we're becoming more aware of the need to start saving money and investing, maybe even a little more than the previous generation," Shigeta said. "But whether we do it or not, that's a whole different story."

The news that Social Security may be not around for the GenXers when they reach retirement age has been a wake-up call for young Americans, who are just beginning to realize that they need to be responsible for financing their own retirement.

But how do you balance the need to save and invest with the urge to spend and live life to the fullest?

Live by Nike's motto, say the experts: Just do it.

"The key for young people is starting now," Shigeta said. "As early as possible, as much as possible."

No one will say saving is easy, especially when you've just started getting regular paychecks. But with some help, and following simple steps, saving can become a habit, one you probably won't want to break.

The earlier, the more profitable

The challenge with twentysomethings is getting them to plan for a future that, to them, seems eons away.

"When you're in your 20s, you don't think about those type of things," said Keith Nakaganeku, a 34-year-old certified financial planner with American Express Financial Advisors. "Retirement, that's so far away, who cares about that?"

Nakaganeku confessed that he didn't think too much about financial planning after graduating from Loyola Marymount, even with a degree in economics.

"I didn't have finances to think about," he said, "but I thought about having more."

It wasn't until he got into the field of financial planning that he came to understand the importance of investing.

Shigeta, on the other hand, grew up with that knowledge. His parents had invested for him from an early age, and he's reaping the financial benefits of an early start.

"It wasn't until I entered the industry, though, that I really realized the importance of starting early," said Shigeta, who handled his stock portfolio while in high school, "and how lucky I was."

Saving is psychological – and not on the minds of most twentysomethings.

"The mentality of saving means you're going to have to change things," he said. "And change is difficult for everybody. We're creatures of habit and, in order to change, we need to have that emotional attachment to change."

But with the future of Social Security a giant question mark looming over GenXers' heads, change may be necessary for GenXers to protect themselves financially in the future. Experts advise twentysomethings to start capitalizing on one of the advantages they have over their parents: Time.

Time is essential for compound interest to work its wonders.

Here's an example: A 20-year-old who saves $2,000 a year for 10 years with a set compounded interest rate (and then lets the money sit and compound further until he retires) will have more money by retirement age than a 40-year-old who saves $2,000 year for 10 years. Any saving is better than none, Nakaganeku said, "but if you start earlier, you'll save for less time and make more money."

Setting goals

Experts urge anyone just starting out to set clear and realistic financial goals to make strategizing easier.

"Make sure you have an objective," Nakaganeku said, "in dollar amounts and a time frame."

The whole process of financial planning is highly individualized, depending on your goals, financial situation and earning power. GenXers don't fit one particular mold: Some are married with kids, some are single; some are still in graduate programs and some are already established in their careers.

What motivates you personally is important to your financial strategy. Buying a home, for example, may require different kinds of investments than paying off a student loan.

"You have to understand your goals, identify and prioritize them and gather data," said 28-year-old Lincoln Koike, a financial planner/manager at American Express Financial Advisors. "Then you want to invest accordingly, factoring things in like the time frame, your risk tolerance and the actual goal. There's different strategies for different goals."

Protect yourself

Younger people typically think they're invincible, so investing in life insurance seems like a waste of money, especially for those with no dependents.

But young people have one advantage over their elders in this regard: Life insurance is less expensive the younger you are, and the premiums don't increase as you age. And some life insurance plans offer an investment component, an option that many financial strategists recommend to their younger clients. Whole life plans, as opposed to term life, for example, provide for a monthly payment after retirement age. And many insurance plans allow you to borrow against the face value – a great fallback for emergencies.

"The key is starting early," Shigeta said. "When it comes to insurance, you lock in your insurability health-wise and you also pay less in premiums."

Disability insurance is another option many young people overlook.

"But think about it," Nakaganeku said. "What's your most valuable asset? It's your ability to earn an income."

He recommends looking at disabilities policies offered by employers, which are typically cheaper than individual policies. Twentysomethings pay smaller premiums to protect thousands of dollars in income, he added.

Experts say this is good advice for anyone, Xers or not. "It's always better to start now, even if they think it's too late," Koike said. "There's never a perfect time to start. The perfect time is right now."

Some advice on getting started toward financial security

Even with tons of information out there about financial planning and investing, twentysomethings still don't know where to begin. Here are some simple strategies to get started:

• Assess your financial situation: Know what you own. "That's our net worth," said Keith Nakaganeku, a 34-year-old certified financial planner at American Express Financial Advisors. "Use your net worth as your measuring stick." Look at your cash flow – what's going in, what's going out. Evaluate your debts and figure out ways to pay them off as soon as possible. And by writing out a budget, you may realize all the little things add up, expenses that you never factored in. "Start saving that money first," Nakaganeku said. "I find that if people spend money then save, there's no money left to save. But if you save first, you have money to spend."
• Consider your goals: Set short- and long-term goals before deciding on a financial strategy. Each goal may require a different kind of investment. Financial planners and/or advisers can help you flesh out your goals and decide on a plan.
• Make saving a habit: With regular paychecks rolling in, it's easy to want to just spend the money. But spending can become a hard habit to break. "More people in their 20s spend a lot more than they make and go into debt," Nakaganeku said. "It's a habit. But so is saving." Budget your expenses and find ways to cut back while living comfortably and within your means.
• Cut back on expenses: One easy way? Bring lunch from home. You could save $5 to $6 a day, about $100 a month. "That's a real easy way to start," said Darin Shigeta, a 26-year-old certified fund specialist at Transamerica Financial Advisors. "Then use that money to invest."
• Save what you can: Don't go into debt investing. Financial experts suggest starting out by saving $20 a week – that's $1,040 a year. "If we can just get ourselves to save just a little, it's simple," Nakaganeku said. "Once you start doing it, it's easy and you may up it to $75 or $100. Maybe after a few years, you're saving $500 a month."
• Pay off student loans: The earlier, the better, experts advise. If you pay off your 10-year student loan in five years, you'll pay less in interest. And that's money that could be used toward other investments. "You want to be done with them and get into a positive position," Nakaganeku said. "Start moving forward and investing."
• Have an adequate cash reserve: Most financial planners recommend clients have enough to cover three to six months of expenses, in case of emergencies.
• Be smart about stocks: With the recent market frenzy, experts advise the young and fearless to be smart about investing in the stock market. "If they're using extra money and they don't mind (losing it), that's fine," said 28-year-old Lincoln Koike, financial planner/manager at American Express Financial Advisors. "But when they're using money that pays for a down payment or education, that's risky."
• Get a 401(k): If your company offers it, take it, say experts. You get a tax deduction from the amount you put in, and it grows tax deferred until you start taking money out. And if the company matches the amount you put in, that's an automatic doubling of your investment. "That's a guaranteed 100 percent return on your investment," Nakaganeku said.
• Be patient: Investments take time. Keep that in mind when planning your financial goals. "Everybody's into instant gratification," Nakaganeku said. "Just make sure you have a good, solid foundation."