The Wall Street Journal
By: E.S. Browning
September 24, 2012
For years, Sean McGroarty ignored his mother's urging to save money.
Then his mother, Karen Zader, 54 years old, lost her job as an administrative assistant. The family home, where Mr. McGroarty grew up, went into foreclosure, and Ms. Zader had to raid her retirement savings to pay bills.
Mr. McGroarty was shocked into action. He signed up for his employer's 401(k) retirement-savings program last year. "What if life throws me a curve ball like that?" said the 27-year-old radio DJ.
As older Americans lose jobs, lose homes and delay retirement, their children are watching and reacting. Growing numbers of young Americans are boosting savings, cutting spending and planning for retirement.
Many people in their 20s and 30s, of course, struggle with debt, low incomes and unemployment. Plenty are financially irresponsible. And young people save less than older Americans.
But young adults are now saving more and starting earlier than people their age used to, according to several broad measures.
Of employees under age 25, 44% participated in their companies' 401(k) retirement plans in 2011, up from just 27% in 2003, according to data on millions of employees whose companies' retirement plans are managed by Vanguard Group Inc. Of those ages 25 to 34, 63% participated in 2011, up from 58% in 2003.
While they still face serious student debts, young people also have cut back on credit-card debt. About 45% of Americans under 35 had credit-card debt in 2010, compared with 63% in 2002, according to survey data from Strategic Business Insight's MacroMonitor. The average credit-card balance for those under age 35 fell to $4,100 from $5,100 over that period, adjusted for inflation. The under-35 group was the only age group that saw average credit-card balances fall.
More saving means less consumer spending in the short run, which holds back growth. But savings provide the raw material for investment, and, in the long term, higher investment leads to an expanding economy.
Retirement planners see a generational change in the offspring of baby boomers. These Americans, generally described as people born between 1946 and 1964, typically were raised by thrifty parents who had survived the Depression. Boomers grew up in a hopeful postwar world, where prosperity seemed to grow with age. Many worried little about retirement and many built significant debt.
Now they are facing a crisis. Unemployment among people ages 55 to 64 has doubled in five years, Labor Department data show. Americans are typically approaching retirement with 401(k) accounts that hold less than one-quarter the amount they need to maintain their standards of living when their work life ends, according to data from the Federal Reserve and the Center for Retirement Research at Boston College. Many of their grown children, fearing that the world isn't getting much better, are trying to better prepare.
Professors Lisa Szykman and Nicole Montgomery of the College of William & Mary's Mason School of Business study savings habits and report that baby boomer parents often mention during interviews how well their grown children understand the need to save.
"The older people said their children already are better prepared for retirement than they were," Ms. Montgomery said.
Mr. McGroarty is part of that economic shift. He drives a 1997 Saab bought for $1,000. To save money, he and his fiancée often eat sandwiches for dinner.
Mr. McGroarty started in music by volunteering at Clemson University's radio station when he was 16. At a DJ job in Florida, he earned less than $25,000 a year, so saving money was tough. He opted out of his employer's health-care plan, he said, hoping to enroll later.
His mother recalled how saving was "drummed into my head by my parents, who were Depression-era people." Ms. Zader contributed regularly to her 401(k) retirement account and set aside enough cash to pay for three months of living expenses for emergencies.
Then her marriage broke up, she lost her job and she couldn't find another. She used up her emergency savings, her unemployment benefits ran out and she wound up paying taxes and penalties to withdraw money from the retirement account. She lost her home. For dental care, she now uses a free clinic.
Ms. Zader and her son spoke frequently as her troubles mounted. She urged her son to take measures to make sure they never happened to him.
"When he saw me being out of work and having to dip into my 401(k), I think that's what really did it for him," she said. "There are a lot of years when you think your kids aren't listening to you, and then it comes full circle and they tell you how much they appreciate what you told them."
His mother's advice was important, but it was her pain that touched him. "My mom was pretty smart," he said. "She saved her money, she saved in her saving account, and then it kind of crumbled. She had never missed a house payment in her life. Then she missed four or five and they kicked her to the curb."
Life threw Mr. McGroarty a curve ball sooner than he expected. In July, he walked into his radio station and was handed his severance pay. He found part-time work at a station in Greenville, S.C., where he had grown up and began building a business as a DJ for parties and events. He plans to wrap his 401(k) from his old job into one offered by his part-time employer in Greenville. He and his fiancée are still eating ham sandwiches--and he is still focused on saving.
"If I can put in $40 or $50 from each paycheck, and they match it, that will be a good start," he said.
Kate Rothrock, age 26, has been putting more than half her $35,000 salary into two retirement accounts. She keeps six months' living expenses in a money-market account for emergencies, as many financial advisers recommend. After working in alumni relations at the University of Virginia, she is looking for a similar job at her new home in Florida.
Ms. Rothrock was motivated in part by her father, a successful lawyer who delayed his retirement after the 2008 stock-market collapse.
"I have seen friends' parents who haven't saved and have lost their jobs in their 50s," said Ms. Rothrock. "They are struggling and some of my friends have moved back home to help their parents. That scares me."
Some of the increased savings by younger workers is because many larger companies have begun automatically enrolling new employees in 401(k) plans. But that is only a partial explanation, according to retirement-fund managers, who see evidence that young people are actively saving more.
"They want to take more responsibility for their retirement than their parents did," said Jeanne Thompson, who analyzes 401(k) trends for Fidelity Investments, which manages corporate retirement plans with more than 11 million participants. "Many are engaging with us on the web or the phone."
The automatic-enrollment system typically starts employees with a 3% contribution, she said, but the average contribution rate for people 21 to 33 is 6%, suggesting an intentional effort to boost savings.
Fidelity said its data indicated that 86.4% of employees ages 21 to 33 contributed to 401(k) plans in 2011, the highest of any age group, up from 84% in 2008.
Julian Grimes, 31 years old, said he puts 15% of each paycheck from his job at a St. Louis manufacturing plant into a retirement savings account. His wife tries to save 10% of the profit from her catering business. They limit their spending. On a trip to New York, they splurged on a Knicks game but ate at inexpensive restaurants. Mr. Grimes cut back on buying new clothes to save up for his daughter's basketball camp this past summer.
"We live by a budget and have done so since we got married, 4½ years ago," Mr. Grimes said. After watching older people he knows run into financial trouble, he added, "I learned a lot of things not to do."
Patrick Marek, 28 years old, of Fredericksburg, Va., said he and his wife were poster children for bad financial habits early in their marriage. They ran up credit-card debt, borrowed against their home to finance spending and took direct loans from the bank. Then their first child was born and the financial crisis hit. Mr. Marek lost his job and returned to school to finish his undergraduate degree. The couple slowed their spending and started saving.
"I just don't want my kids to have to help me or watch me go through a hard time when I get to retirement," Mr. Marek said.
He and his wife focused first on cutting their debt. They are now putting 5% to 10% of their income into an individual retirement account. "It was kind of like a switch went off in our heads, that we had to get our act together," he said.
Not all young adults show this discipline. Many are swamped with student debt, credit-card debt and other expenses. They earn less than older people. Plenty don't even try to save and say they focus more on spending. But financial planners see a growing number start saving earlier than baby boomers.
"Clients of ours that are young have seen their parents go through events that they are concerned about," including financial crises and unexpected medical bills, said Brad Rempe, a certified financial planner at the Foster Group in Iowa. "You run into people who are 33 years old and are buying long-term care insurance. That is the result of a personal experience."
A survey published last year by TD Ameritrade Holding Corp. showed that younger people are more likely than baby boomers to be paying into both a 401(k) and an IRA. Individual experiences vary widely, but many are winding up with the same plan: more savings, less debt.
Peter Wallace, a 29-year-old health-care lobbyist in Washington, D.C., says he puts nearly 20% of his salary into his 401(k) and IRA. He cites in part the experience of his mother, who depends heavily on money she and her late husband saved.
Ashley Davenport, a consultant on electronic medical records in Chicago, had accumulated nearly $30,000 in credit-card debt. Three years ago, the 26-year-old woman began a repayment program and retired the debt this year. Now she is paying down student debt and planning to increase her 401(k) contribution starting this month.
Many universities offer undergraduate courses in personal finance. The University of Virginia's longtime class now has a waiting list, even though it begins at 8 a.m. and is limited to fourth-year students, a group notorious for avoiding early morning classes. Interest has grown since the financial crisis, said Karin Bonding, a financial adviser who has taught the course since 1996.
"It does tell me that students are anxious to know about their personal finances," she said.
Ernst & Young, which gives financial-planning services to employees of many large companies, said inquiries from younger employees were up. Most calls were still from people nearing retirement, E&Y said, but last year 8.1% came from people under 30, up from 5.7% in 2009.
Young people want to know how to juggle loans, mortgages, credit-card debt and other expenses, said Lynn Pettus, E&Y's partner heading the employee financial-planning service. "People say, 'I know I am participating in the 401(k), I know I need to save more, but I have these competing interests, so please help me prioritize,' " she said.
Andrew Mizerak, a 36-year-old anesthesiologist in Ames, Iowa, said he was inspired to save after seeing colleagues delay retirement because of the 2008 stock-market collapse.
Dr. Mizerak and his wife, Krista, have become ultra-budgeters, with much of the calculations done by Ms. Mizerak, a former middle-school math teacher. They have budgets for household costs, travel, Christmas and retirement. The couple has set up six college-savings accounts for their three small children, with each parent creating one account for each child.
They installed laminated kitchen counters instead of the granite ones Ms. Mizerak coveted. Dr. Mizerak drives a pickup truck with enough space for three kids' car seats, instead of a BMW he would like. They allow themselves a "fun fund" for fashion boots and the like.
Many young savers cited the fear that government retirement programs will be gone or curtailed by the time they qualify.
"Friends of mine in our 20s, we joke that there isn't going to be any Social Security when we get old enough to collect," said Mr. McGroarty, the DJ. "But it isn't really a joke. What are we going to do after we retire?"