Opinion: Future holds wealth for young 401(k) contributors

This investment question is becoming more common. An increasing number of young people or their parents are seeking help.

A roughly two-hour meeting can help young workers determine their risk tolerance, gain basic understanding of mutual funds available in 401(k)s and establish the percentages of contributions that should go into the selected funds.

I can remember wanting to learn about investing when I got out of the service and took my first job. The only person who wanted to talk to me about investing was a staff sergeant who had been in my unit and was pitching contractual plan mutual funds – one of the mutual fund industry’s all-time rip-offs.

Seeking nest eggs

Here’s what happens in the real world of investments: Darn few planners or brokers or money managers serve the young market.

Everyone wants the larger accounts, the ones with which they can make an acceptable, ideally significant, profit, so the beginning investor has very few places to turn when he or she wants to begin setting aside small dollar amounts for accumulating a retirement nest egg or establishing an education fund for kids.

The shame of it is that these are the people who most need help. Their parents and grandparents, the ones likely to have their nest eggs, are the preferred clients of the financial industry, but who wants to spend time on a $100 or $200 transaction when he could be working with wealthy prospects and clients?

Sure, when you’re young there are things that you want to acquire, things that you can rationalize as being needs but that are really “wants.” And true, there are expenses that can’t be ignored. But with only a modicum of discipline and a commitment of a few dollars a month, it is amazing what wealth can be built by those starting young.

Real-life example

Let’s say you’re 22 and just starting your new job, making $30,000 a year. Your employer offers a 401(k) plan, and you decide to contribute 5 percent of your salary. He contributes half of the amount you put in up to the point that you would put in 6 percent of your salary.

Those are the facts; now for the assumptions. Let’s assume you are going to retire at age 65, that inflation is going to average 3 percent annually, that the average return on your plan’s investments is a historically conservative 8 percent and that your hard work will pay off in an annual salary increase of 4 percent.

Fast forward: At your retirement dinner, you are smiling – not about the gold watch you received but from the knowledge that you have a nest egg of $1,288,583. That is, until you talk with Sam, your co-worker who started when you did, but contributed 10 percent of his salary and could buy a gold watch for everyone in the room with the $2,233,440 he accumulated.

The sad fact is that most individuals just starting out are more concerned with car buying than with the retirement benefits of a 401(k), and they often choose not to participate or do so with very low percentages of their salaries.

If you have children or grandchildren entering the work force, do them a favor and help them understand the effect of their decisions now on their wealth in the future. You can begin by going through the exercise of discussing the numbers for them.

There are many calculators on the Internet that will help; the one I used for the above example is at www.finance.cch.com. Ask a financial consultant to help with the investment selection process.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]