Should Millennials contribute to a 401K? No, that is not a rhetorical question. I was having lunch the other day with my co-worker Jill. Jill is an exceptional young woman. Jill’s parents divorced when she was young, so she grew up in a broken home. That did not stand in the way of her excelling in school. She went on to earn a BA in Psychology from one of the best state universities in the country. She is also considering going back to graduate school for a Master’s Degree in Public Administration.
Jill and I have worked together for almost one year. Jill was lucky because she was hired just a few months after she graduated from college. She is a great employee, person, and is highly ambitious.
She told me that she developed her work ethic as a young teenager. She said that growing up without a dad around, she had to work to help her mom pay the bills. Jill started working at age 14 and has always had a job during high school and while in college.
When we were talking, she told me that when her parents divorced they had an agreement to give each child $40,000 towards their college education. Her brother went to Notre Dame and the money he received from his parents covered about one year of his education. Jill opted for a state university that was only a 2-hour drive away from her Mother.
Jill’s education cost her parents $30,000. Her parents tried to be fair about the dollar amount. After graduating college, her parents also bought her a used car for $10,000. Even though she did not get to watch the Fighting Irish play football in South Bend, she still made out well.
During our lunch, she told me that she feels bad for her current roommates. Most come from families that are more affluent than her family. However, they all have student loan payments that cost $700 or more every month.
She asked me my opinion about her situation. Should she feel bad? What should she do with the extra money she has compared to what her roommates have? She said that she did not grow up with much and does not want to waste it.
I told her that she is in a fortunate situation. She has a unique opportunity to save a great amount of money since she does not have any debt and her only large bill is her monthly rent. I suggested that she pretends that she has as much student loan debt as her roommates and to contribute $700 per month to our employer’s retirement plan.
She asked me “Should Millennials contribute to a 401K”?
I told her that millennials should absolutely contribute to a 401K. I said that she especially should because she does not have any debt to pay back or major bills. These are the reasons why she should start contributing:
- She is 22 years old and by starting at that age, she can be well on her way toward financial independence (FI) in 15 years or less
- Our plan offers low-cost index funds
- Our employer matches 100% up to the first 5% an employee contributes
- The contributions lower her taxable income
- The money grows tax-free and is not taxed until she withdraws it at retirement
- She can take advantage of dollar-cost-averaging
- She can enjoy the benefit of compound interest
- If she gets a different job, she can take the money with her and roll it over into an IRA
- Even though I would advise against it, she can borrow against her account if need be
I explained to her that time goes by very quickly and she has a golden opportunity to build some serious wealth for herself. Unless she lands a government job, she will not have a pension. She will need this money to support herself in the future.
Jill has a unique situation. She is a young millennial without any debt. What makes her even more unique is that she is a new college graduate without any student loan debt.
If you have student loans, you should still contribute to your employers 401K account. Even if it is just enough to get the match. After you pay down your debt, take the dollar amount that you were paying towards your loans and direct it to your 401K.
You might not get to Financial Independence as quickly as Jill does. You will, however, get there if you take a few steps. If you have debt, pay off your debt and don’t create new debt. Save as much as possible. Sign up for your employers 401K plan as soon as you are eligible.
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Note: This post was originally published as a guest post. The post was moved here because it was not available to be read on dollardiligence.com. That site is no longer active.