Starting young - Investing for the future

To most twenty-somethings, the language of retirement investing and financial planning -- 401(k), 403(b), 457, IRA, tax-deferred annuities -- sounds like gibberish.

After all, who needs to worry about retirement when it's 40 years down the road?

The answer, say those in the know, is everyone.

"A lot of young people, when they think of the issue of retirement, they zone out," said Dr. Michael Devaney, an economics and finance professor at Southeast Missouri State University who teaches classes on investing.

"For someone in their 20s, that's projected to have, say, a 40-year working life, those early contributions will have a tremendous compounding effect," he said. "That's why it's so important to start early, because a dollar that's put in when you're in your 20s is going to be worth several times more."

The wisdom of getting a jump on saving for retirement and taking advantage of the wonder of compounding interest isn't new, but that advice has gained more prominence recently.

President George W. Bush began his second term by talking about an impending crisis in Social Security and pushing for reform through privatization.

While estimates differ on when the system will go bankrupt, it's generally agreed that it will happen in either 2042 or 2052, according to the Social Security trustees and the Congressional Budget Office. That's right about the time workers now in their 20s will retire.

Jared Tanz, a 24-year-old employee with the city of Cape Girardeau's Parks and Recreation Department, has seen the news about Social Security and decided to take his financial future into his own hands. After attending a meeting on the city's investment benefits, he knew what course he would take.

"We had a meeting about it and I really liked what I heard," Tanz said. "I was getting more money than I was used to with this job, so putting some back wasn't a big deal. I like the idea of being financially set by the time I'm 50 or 60.

"I know about all the stuff going on with Social Security, and I knew there may not be something there to fall back on when I'm ready to retire."

That's a wise choice for any young person looking at the future, Devaney said.

"It's an uncertainty to say what Social Security's going to be, but almost certainly it's going to be reduced benefits for people who are in their 20s now," he said. "For someone that's 22 years old, it's kind of an unanswered question how much of their retirement they can expect to be funded through Social Security versus private pension programs."

Surveys show that today's young workers are concerned about the future of the government system that has helped supplement retirees' incomes since the days of Franklin Roosevelt.

A Zogby International poll released Friday reported that 61 percent of voters under 30 years old were in favor of individual retirement accounts of the sort Bush is pushing for. The same poll found that 61 percent of voters of all ages said the Social Security system was facing "serious problems" and requires "major changes."

Some employers are already seeing that concern manifested in a slight increase of young workers investing in their company's retirement plan.

"I think more recently they have been," said Karen Strong, personnel coordinator for payroll with the city of Cape Girardeau. "Of course, that's always a hard sell because they don't realize they need it yet."

Philip Dame, an investment adviser with Raymond James Financial Services in Cape Girardeau, said that he hasn't seen many young people in his office, but he thinks private accounts for Social Security could raise awareness among young workers.

"It's not strong in young people's mind," he said. "There are exceptions, but I think it would be a great tool if they were able to take part of the money that's going into Social Security and put it in a private account."

Another way to look at it that might make more sense to young people, say Dame and Devaney, is to see investing as a way to save money for financial needs other than retirement.

Dame points to one of his clients who started young and was able to buy a home with his savings.

"That's the other issue," Dame said. "There are things that come up in the next 20 years with these people or the next 30 years as they raise kids and send them to college and buy houses. If they put all their savings in retirement, there's no way to get it out without paying big penalties."

The preferred way to save is to invest in a tax-sheltered account, where money is put into savings without being taxed as income, such as the 401(k) programs offered by many companies, Dame said. Withdrawals from those accounts before retirement are without penalty, while withdrawals from traditional Individual Retirement Accounts do carry a penalty.

"Retirement is the objective, but it's a very important form of tax-sheltered savings," Devaney said.

Southeast Missouri State University student Kelly Darby isn't saving in one of those accounts yet, but only because she's still a student.

"I do taxes at H&R Block," said Darby, "so I've seen first-hand what people have to go through when they just have Social Security or small pension plans."

As with many students, she's waiting to get a good-paying job so she can start putting money in a 401(k)-type account. Until then, she puts her savings in the bank.

But before anyone invests, said Devaney, they need to be informed.

"There's a lot of people out there who are more concerned about selling investment product than they are about helping people fund their retirement, so you got to be careful," he said.

msanders@semissourian.com

335-6611, extension 182