No Portfolio, No Problem? Basic Retirement Savings Advice for People Just Getting Started

Every week, I send this column out into the tubes and fibers of the internet.

It’s a great feeling, but the part of my job I like even better is when someone says to me, “So, you write a personal finance column? Can I get some advice?”

My response: sure, I’d be happy to give you free advice. All I ask in return is that you let me use you as a character in my column.

I’ll give you a pseudonym, and not an overly clever one like “Penurious in Poughkeepsie.”

Generally, the questions people ask me break down about evenly into two categories:

1. “How should I invest my portfolio?”

2. Everything else.

The first type of question is easy. The second is not, because it usually starts with, “I seem to have gotten into a little trouble.”

Recently, I’ve had a spate of advice-seekers in the second category. Some are in trouble, some not. But they’re not asking about their portfolio, because they don’t have one.

The conventional wisdom on retirement saving is “save early and take advantage of compound interest.”

Here are a couple of ways you might have heard this advice:

• “Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks.” —CNNMoney

• “Waiting to start to save until you are 40 is a big financial mistake. The key years for saving have passed you by.” —Dee Lee, WBEZ Radio (Boston)

There is some truth to this, but only some.

No portfolio. No problem?

Being in your twenties is great. You’re young, optimistic, and close enough to your teen years that you still know almost everything.

It is not, however, a great time to sock away money, especially in our current labor market. Twentysomethings have a few strikes against them when it comes to accumulating retirement savings:

• Paying down student loans
• Lower pay, on average, than workers in their 40s and 50s (according to US census data)
• More likely to be unemployed: 12.7% of workers age 20-24 are unemployed, along with 8.4% of workers 25-29, according to the Bureau of Labor Statistics. Workers age 45-54 have an unemployment rate of 5.8%.

To reinforce the importance of saving at a young age, financial planners often pull out a beloved chestnut about two friends or siblings.

One saves $1000 a month from age 25 to 35 and then stops, letting compound interest do the rest. The other starts at age 35 and saves $1000 a month until retiring at 65.

You already know the rest: slow and steady gets the early worm, or something.

But this chestnut deserves to be roasted, because it has little to do with real life: on average, older workers make more money than younger ones and have a greater ability to save.

In other words, if you find yourself at age 35 with no retirement savings to speak of, it could be a bad situation or it could be fine. It just depends.

Real people

Two couples in their thirties have recently come to me for advice.

Both make decent middle-class incomes and have minimal retirement savings. But one couple is in good financial shape and the other is in big trouble.

Holly and Dana are sitting on a mountain of debt. Their house is underwater, and in addition to their mortgage, they have owe tens of thousands of dollars in student loans and credit card debt.

Their debt payments and nondiscretionary monthly expenses about to nearly 90% of their income. (Sometimes people come to me because they know they have a problem and just need someone to say it. I can understand the impulse.)

Meanwhile, Amy and Mike have a lower income, but no debt and a fully paid-off house.

That’s not enough to carry them into retirement. They should start saving now. But they’re also in a good position to do so.

I realize how facile it is to point out that a couple with severe debt is worse off than one sitting on a paid-off house.

But it’s no dumber than offering a one-size-fits-all prescription like “everyone should have a sizable portfolio by age 35 or else.”

When you’re young, preparing for retirement can take many different forms:

• Paying off debt (prepaying a mortgage or student loans)
• Spending time or money on education (college, internships, fellowships) to increase your future employability and salary
• Buying medical, disability, and life insurance
• Adjusting your lifestyle so you don’t need as much money to live on
• And, of course, putting dollars into a retirement account

A holistic look at whether a person is on track for retirement can’t be reduced to a simple slogan, formula, or rule of thumb.

People, get ready

Of course, none of this should be taken to mean, “I don’t need to start saving yet, because some guy on the internet said it was okay.”

People in their 20s who have the opportunity to save should take it and will be glad they did.

People in their 50s who aren’t saving aggressively are probably in trouble. And everyone should take advantage of a 401(k) match.

But there are a variety of paths to sustainable retirement saving, and setting aside 10% of your paycheck starting the day you sit down in front of the corporate training video is only one of them.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.