Protecting yourself

If you aren’t saving in your 20s, you’re doing something wrong

Kelly Dilworth

An essay on the millennial website, Elite Daily, went viral last week when it brazenly declared that, “if you have savings in your 20s, you’re doing something wrong.” Shared more than 60,000 times on Facebook, the essay mostly reads like an instruction manual on how to rack up credit card debt and torpedo your retirement.

“When you live your life around your retirement fund, you might as well retire now. You can’t make a mark on the world if you’re too cheap to live in it,” writes 20-something writer, Lauren Martin. “Refusing to give yourself the luxury of enjoying your money negates the whole point of making it.”

According to Martin, 20-somethings are better off spending their money on once-in-a-lifetime experiences than on a future that’s uncertain. “When you’re acutely aware of your mortality, it makes spending money that much easier. Those who don’t plan for the future aren’t planning for their death.”

The problem with Martin’s argument is if you don’t prepare early for a longer — and potentially more calamitous — life than you expect, you could wind up in a much scarier place by the time you’re ready to retire.

Living a rich and eventful life doesn’t have to be that expensive, either. Spending every weekend clubbing, eating out and taking taxis as Martin describes can add up quickly. But there are plenty of things you can do instead that are much less expensive — and often just as memorable. (For ideas, just take a look at the free events put on by your city or consider banding together with your friends and hosting potluck dinners, game nights and other inexpensive adventures.)

Spending all your money in your 20s also makes it a lot harder to have just as much fun in your 30s, 40s, 50s and beyond. If you blow all your money now, you could be forced to spend your 30s and 40s holed up at home, mailing interest payments to your credit card issuer.

A report released Wednesday by J.P. Morgan Chase drives home that point by illustrating what can happen if you follow Martin’s advice and save too little, too late. The entertainingly written report — structured in the form of a TV script — follows the long-term outcomes of various fictional characters who take sharply different routes to preparing for retirement.

In many of the scenarios, the characters just barely save enough to retire comfortably, as long as everything works out the way they expect. Predictably, various calamities befall them, altering their life paths. For example, a character accidentally overdoses on toxic Guatemalan sunflowers at the Burning Man festival and is forced to take an early retirement. In another, more common scenario, a character loses his job and survives three years of unemployment by taking out multiple loans. Some of the fictional characters’ retirement plans are also upended by national events outside their control, such as cuts to Social Security and fluctuations in the stock market.

In another memorable episode, two characters are forced to retire early and draw Social Security at a discount, but then learn that their paltry, 3 percent a year savings aren’t enough to sustain them. “They almost immediately become insolvent at their planned level of spending,” write report authors, Michael Cembalest, Anthony Woods and S. Katherine Roy. Their only way out? “Cut their spending almost in half, which is practically impossible for non-hermits.”

The purpose of the fictional scenarios is to drive home the point that life rarely works out the way you planned it. To be truly prepared for retirement, you have to allow for adverse events and save accordingly – including when you’re still in your 20s and have decades ahead of you before you retire.

According to Boston College’s Center for Retirement Studies, more than 75 percent of adults between the ages of 50 and 60 will experience some kind of financially destructive adverse life event, such as job loss, divorce, illness or death of a spouse or parent or ongoing health problems. Meanwhile, more than 67 percent of people over the age of 70 will suffer an adverse event sometime within the next nine years.

Many of today’s 20-somethings are also likely to face additional financial pressures, such as reduced entitlement benefits and longer life expectancies, making it even more important that they plan and save accordingly. Researchers at J.P. Morgan Chase recommend that today’s 20-somethings start saving a minimum of 4 to 9 percent of pre-tax income by the time they’re 25.

It’s tempting to put off saving for retirement until you’re deep into your 30s and 40s and less enthralled by the newness of adulthood. I know because I, too, put off saving for retirement for the sake of ‘once-in-a-lifetime experiences.’ But as the Chase report unnervingly shows, it’s also dangerously misguided.

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