What crisis? Young investors are counting time on their side

By Elizabeth Sheeran

Want to make sure you don't have to keep working until you're 100? Even if you're under 30, it's never too soon to start building your nest egg, and current market conditions give new meaning to the term "getting in on the ground floor."

Investors watched in horror last year as U.S. stock prices spiraled downward and the Dow Jones Industrial Average at one point plunged to less than half its peak, before managing to creep back up to where it now hovers around 10,000. But younger savers have fared better than their parents and grandparents, in part because they have decades to wait for the market to recover.

"I was affected a little bit but I wasn't that worried about it because the market goes in waves, it's going to go down sometimes, it's going to up sometimes," said Laura Chandler, 27, a computer programmer for a Framingham technology company who has a retirement account at work as well as some money invested in a mutual fund. "Thankfully I'm not 55 and approaching retirement and going 'aaahh, my savings just went down the tubes.'"

A silver lining in the crisis: young savers outperformed their folks

The Pew Center reported in June that adults over 30 were three times more likely than younger adults to have lost 20 percent or more of their retirement savings. And Ken McDonnell of the ChooseToSave project, a non-partisan, non-profit think-tank that aims to educate Americans about personal finance, said data shows younger adults have seen their 401k retirement account balances rise substantially more than older adults since the market's low point.

McDonnell said there's no way to track whether older adults were more likely to panic and pull out of the market before it had a chance to recover. But the data shows that young adults continued to contribute to their 401k retirement accounts throughout the worst of the market crisis.

"They benefitted more from the rebound because they left their funds in the market and they continued to contribute, and look what happened," said McDonnell. "For young people with a lot of time before retirement, if they can just ride out that market volatility, they'll be fine. When you're young you can take a much greater risk because you have a much longer time horizon to get to your goal."

Allison DiNitto, 23, a cost estimator for a Texas-based oil company that matches employee 401k deductions up to six percent of income, said she never considered backing out of her retirement savings plan when the market crashed because she felt she had little to lose. Instead, she decided to take advantage of the low point in the market.

"Stock was just really cheap, so at that point I just ramped up. I think I had started out with 10 percent going into the 401k and I ramped it up to 20, which is the maximum we can put in, because, I mean, cheap stock - you might as well take advantage of the situation," said DiNitto.

Even young adults who made no changes to their retirement account contributions have benefitted from the most basic rule of investing - buy low, and sell high - since the same amount of money goes farther in a down market, said McDonnell. "In an odd twist of fate, when it comes to young people what happened is an opportunity for them because they can now afford to buy more."

Regardless of the market's ups and downs, young savers who got a foothold in the market and are hanging in there through the turmoil are doing the right thing, because saving for retirement is even more important for today's twentysomethings than it was for their parents.

Why it matters now more than ever

The good news: people are living longer. Twentysomethings today are expected to live five years longer than their parents and fifteen years longer than their grandparents. They are 50 percent more likely than their parents to live to celebrate their 85th or even their 100th birthdays.

The bad news: people are living longer with less assurance they're going to be supported by the same kinds of retirement income that took care of their grandparents in their golden years.

"There was a time where if you could just hang on to your job and a house, that was everything. You were set for life," said David Fieldhouse of Fieldhouse Financial Services, who has been providing personal financial services for three decades. "Those days are gone."

Fieldhouse is among many finance professionals who predict that today's young adults won't be able to count on getting most of their retirement income from Social Security, the way their grandparents did, because the program was put in place at a time when life expectancy was only 64 years old, and there were more than 40 adults of working age for every one retiree. Today there are only three workers supporting each retiree. "Social Security was never designed to pay 20 to 30 years," said Fieldhouse.

And your employer is even less likely to provide any guarantees about your retirement income, since most private companies no longer offer traditional pensions with clearly defined retirement benefits. Employers today are more likely to sponsor some kind of individual retirement account plan, of which 401ks are the most common variety, which rely on voluntary contributions and long-term investment returns to accumulate enough money to fund a decent income after retirement.

Starting now, starting small

Over 60 percent of adults in their twenties work for an employer who sponsors a 401k plan, and a majority of eligible employees participate, according to the Employee Benefits Research Institute.

401k plans offer two attractive incentives for young adults, said McDonnell: lower income taxes and the employer match on part of their contributions.

For young employees who pay up to 40 percent or more of their earnings to federal, state and social security taxes, a $100 pre-tax contribution to a 401k plan cuts only around $60 from their take-home pay. And if their employer offers a 100 percent match, that $60 sacrifice translates into a $200 contribution to their retirement savings.

Many workers will at least save enough to get the full benefit of the matching funds, said McDonnell, "otherwise you're just giving away free money."

But McDonnell said too many twentysomethings still don't take advantage of their employer-sponsored 401ks, and they're even less likely to save on their own if they can't do it at work, because their primary focus is on their immediate needs.

Steve Raffael, 24, said he's eligible for the 401k plan at Home Depot, where he has worked for four years, but he doesn't contribute despite the match because "to put it in takes away from what I need to pay for today, like food and clothing and all that. So to put away for tomorrow doesn't really help today. You have to get through today to get to tomorrow, so it just kind of hinders your everyday life."

Part of ChooseToSave's mission is to convince more young adults to join the millions of their peers who are taking advantage of the fact that the sooner they start investing now, the more secure they'll be down the road, even if they're starting small.

"Small amounts you put in early in life through the magic of compounding make a huge difference later in life," said McDonnell. With an eight percent average return, a 22-year-old who starts putting away $200 each month will have nearly $1 million by retirement age. Wait just 10 more years to get saving, at age 32, and the total drops to less than half that, at around $430,000. (Check out still more scenarios using the calculators at ChooseToSave.org).

If they fail to see the opportunity in the market right now, there's always this sobering reminder: "I say to them, 'You do realize that at some point in your life you will be 67,' " said McDonnell.