NEW YORK, Nov 29 (Reuters) - When it comes to saving money, Generation Y is asking “why not?”
Young people are discovering that the earlier they start saving for retirement and the longer they work, the larger the nest egg when they finally want to use it. And they are looking for ways to change their savings behavior accordingly.
This is an important lesson to hold dear for a generation, born between 1979 and 1991, that came into the workforce in the midst of financial turmoil. Now these young adults have to deal with prosperity issues as the economy improves, unemployment wanes and the country faces a myriad of tax and economic policy changes at the start of 2013.
Leading into these changes, more Generation Y members are seeking advice on how to manage finances than any other generation, according to a survey performed by Merrill Edge, which found that 84 percent of Gen Y is seeking advice on finance, compared with 76 percent overall.
“They want to take action,” said Alok Prasad, head of Merrill Edge, the investment management partner to Bank of America Corp.
A healthy 83 percent of Gen Y-ers are contributing to a 401(k) plan, up 8 percent from 10 years ago, according to Fidelity. And for those who are prevented from taking action because of apathy, there is auto-enrollment. The number of companies that have chosen to enroll employees automatically in 401(k) plans grows by 25 percent every year, according to T. Rowe Price.
This is what Generation Y is up against: In order to maintain a similar standard of living in retirement, they need to save 15 to 20 percent of their annual incomes beginning at age 25, according to Christine Fahlund, vice president of T. Rowe Price investment services.
While Generation Y is not achieving perfect success - average contributions are about 4 percent of current salaries, according to T.Rowe Price - even a little can go a long way.
When an investor starts young, as long as she is working, compounding interest can build even meager savings into a considerable sum. A 25-year-old making $45,000 per year who contributes 4 percent of her salary would likely save $160,500 by age 50, and $564,000 by 65, according to T. Rowe Price.
Someone saving 6 percent, by comparison, would save $240,700 by 50 and $846,000 by 65. This means that the difference in savings would be equivalent to a 50 percent increase in total savings, for only a 2 percent increase in contributions.
Yvonne Reed, 29, began contributing 10 percent of her salary to her 401(k) plan when she started working for a large entertainment company in Orlando, Florida, in 2007 at age 24.
“My thought was, I have more cash than I need to spend now, so what do I do with it,” Reed said. “I could buy a condo, pay off student debt or I could invest it.”
Reed used a calculator on Fidelity’s website to work out her daily spending and bills. So far, Reed has saved $50,000 in her 401(k) plan. With her current salary at $70,000, Reed is on track to save between $4 million and $16 million by the time she retires at age 70, according to a contribution calculator on Fidelity’s website.
Reed laughs when she receives emails from Fidelity projecting a fund in the multiple millions by the time she retires.
How young savers are allocating their investments is as important as the mere act of saving. Financial planning firms like Merrill Edge and T.Rowe Price offer copious information on their websites about how to use their products. However, a focus on younger investors still takes a backseat to the boomer generation, who are preparing to retire soon.
To fill this space where the large players fail to connect, companies are offering low-cost financial advice for young investors.
The specialized approach is needed because Generation Y is in a different investment position than their boomer parents, who cannot put money into retirement markets when markets are down. They do not have enough time to recover, according to financial advisers like T. Rowe Price’s Fahlund.
But the younger generation seems more concerned about the possibly impact of the economy on their savings actions than the rest of the country. The Merrill Edge study found that 83 percent of the Gen Y group vocalized this concern, more than the 75 percent national average.
Young adults should not let this concern affect investing risk tolerance, Fahlund said. Gen Y should view down markets in the opposite way - when prices are down, investing returns will be better decades down the line.
Some Gen Y investors have proven adept at taking the long view.
“I am saving for the day when social security isn’t there,” said Katie Vojtko, 25, a college graduate with a major in finance who does marketing for a start-up technology company in Pittsburgh. She is putting away $5,000 (the maximum contribution allowed) each year into a Roth IRA, and she is planning to start a 401(k) - her company does not offer one automatically in its benefits package.
Investing during a down economy spooks her boyfriend, but Vojtko seizes the opportunity to save. “I may be investing in an economic downturn, but I don’t care,” she said. “One day, that money could pay for my kids’ college.”