Your new college graduate is dipping his toe in the workplace, learning the technology, figuring out office protocol and fixating on the first assignment.
With all that excitement and anxiety, it is easy to overlook the section of the HR employee handbook that describes the “savings and investment” options available to employees.
Those choices typically include a 401(k) retirement account or something similar, which the employer will contribute to up to a certain percentage. And in some cases there’s an opportunity for new employees with a few months of work under their belt to purchase shares in the company’s common stock at a discounted price.
For many of those new to the workforce, this is their first experience with investing and making their own choices. It’s an important step in becoming financially independent — no more tapping the Bank of Mom and Dad.
But unfamiliar territory often breeds procrastination with a capital P.
Your 20-something might not see the benefits of socking away part of their paycheck for retirement when the date they’ll actually get their hands on the money is such a long way off. Or they might think that buying company stock is a benefit reserved for the bigwigs in the glass offices.
When I was fresh out of college and newly employed, I was too tempted to spend my disposable income on immediate gratification — clothing, concert tickets, anything but the company stock purchase plan. (A 401(k) wasn’t yet available.) I had never bought stock before and didn’t see any possibility of being able to afford a few shares.
Or so I thought for several years of missed investment opportunities. In hindsight, that was a big mistake.
What’s often misunderstood by fledgling investors is that taking advantage of the company’s 401(k) plan or stock purchase program can be accomplished in small doses. What’s important is getting into the habit of putting money aside for longer-term goals rather than spending it. Once the habit is formed, it becomes more difficult to break because your money is in the game.
Moreover, not putting money into a retirement account means leaving money on the table. Most employers offer a matching program, for example $1 for every $2 you put in up to a certain level.
Financial planners generally recommend that workers invest at least 7 to 10 percent of their paycheck in the company’s retirement program, excluding the company match.
Since these dollars are earmarked for 40-plus years down the road, young workers can afford to take a little more risk by investing more heavily in stock mutual funds and other equity products. Still the asset allocation depends on your comfort level.
Whatever you do, understand what you’re investing in — even if it’s stock in your employer. If you’re unsure what to do, ask for help from a co-worker or someone else who has become a mentor.
Be skeptical of the projections for rates of return tossed out by some retirement planners who are pitching 401(k) products at your workplace seminar. Some of those projections are riddled with flawed assumptions. Remember the sage advice “Past performance does not guarantee future results.”
Which leads to a final point: There’s nothing like firsthand experiences to teach new investors about diversification, risk, staying up with current events and learning to roll with the stock market’s punches.
To reach Steve Rosen, call 816-234-4879 or send email to firstname.lastname@example.org.