Posted on: Thursday, May 22, 2003

Experts urge retirement planning earlier in life

By Wendy Tanaka
Knight Ridder News Service

At the height of the technology boom in 1999, Jessica Lontz was earning $150,000 in salary and commissions as a recruiter for the Philadelphia area's tech sector.

She was 23 then, and her income allowed her to eat out five nights a week and take frequent ski vacations. Saving for retirement, however, was not high on her list of priorities.

"I was great at throwing money down the drain," said Lontz, a Philadelphia resident who is now 27 and making a third of what she earned in 1999. "In retrospect, I should have saved a ton more than I did."

In terms of saving for retirement, Lontz is typical of workers in their 20s. According to a Fidelity Investments report published in 2000, less than half of workers in their 20s participated in their company's retirement savings plan. For those in their 30s, the participation rate increased to 64 percent.

For many younger workers, it is difficult to think about building a nest egg that cannot be tapped for 40 years. Others say they do not earn enough to save, or that expenses such as student loans eat up any extra cash.

"What happens for the single, young professional is that they are generating salary to cover expenses, and they are not looking to investing seriously until a time when they might have missed out on long-term benefits," said Michelle Smith, spokeswoman for the Mutual Fund Education Alliance, an association for the no-load-fund industry.

But with fewer companies offering traditional pension plans and the future solvency of the Social Security program very much in question, experts say younger workers need to take retirement planning into their own hands and start saving as soon as they can.

"The longer it takes for you to get started, the less you'll wind up with in retirement income," said Jack VanDerhei, an expert on 401(k) plans and a professor at Temple University's Fox School of Business and Management.

This is because earnings on money invested annually in a tax-deferred account are compounded. For example, if a 25-year-old starts saving $1,000 a year for 40 years in an account with an average annual return of 7 percent, he would have about $214,000 by age 65, according to Vanguard Group Inc., the mutual-fund giant in Malvern, PA.

Waiting until age 35 to start saving $1,000 annually, the same person would have amassed about $100,000 by 65 — less than half what he could have had if he had started saving just 10 years earlier, Vanguard said.

"Whatever people have put aside today — even if it's not a whole lot of money — it will be 60 years from now," said Vanguard principal Catherine Gordon.

Experts say younger workers should try to take advantage of as many types of tax-deferred savings options as possible. Besides a company-sponsored retirement plan such as a 401(k) or 403(b), they can open IRA accounts.

VanDerhei said it will be more difficult for younger workers to save for retirement than past generations. Pre-baby-boom workers "were in a very paternalistic retirement system, and they didn't have to decide on asset allocation," he said.

"It's going to take more individual responsibility. No one is looking over your shoulder, saying, 'You have to do this.' "

But after three years of a bear market that has depressed the values of 401(k) accounts, some workers have decided not to participate in employer-sponsored savings plans.

Indeed, the participation rate fell to 73 percent last year — the lowest level in a decade, according to a recent survey from Buck Consultants, a human-resources consulting firm in New York. The report also estimated that younger workers had shied away from enrolling in company-sponsored plans.

Dan Mascenik, 28, of Wyncote, PA., is one of them. The computer programmer decided not to participate in his new employer's 401(k) plan.

"I was feeling lukewarm about 401(k)s, especially with the state of the stock market," said Mascenik, who joined Giving Capital Inc., a Jenkintown, PA., company that advises corporations on charitable donations, last year.

Instead, he and his wife, Shannon Geary, also 28 and a graduate student at the University of Pennsylvania, are saving through IRA accounts, and they are using whatever extra money they have to pay down the mortgage on the house they bought in 2000.

"By paying off more of the mortgage, we get more cash out when we sell the house" later on, Mascenik said.

Mascenik and Geary also contribute their tax-refund money to their IRAs annually.