Encouraging Workers to Save While Paying Off Debt

Nationwide Retirement Institute has published a new analysis focused on instilling positive savings behaviors among younger workers, “Smart financial moves in your 20s and 30s.”

According to Nationwide, most people wish they had handled their money differently in the past year, including many who say they wish they had saved more for retirement. On average, the survey shows, employees start saving for retirement at age 31.5—meaning they have about 35 years of asset accumulation and potential investment earnings to rely on at retirement.

However, Nationwide says, if workers started saving for retirement eight years sooner on average, they would have significantly more available for retirement income. The analysis steps through the example of a participant who is paid twice a month and contributes $50 per pay to an account that earns 6% annualized return on investment. If an employee starts this regimen at age 23, they can generate up to $88,572 more than if they started at age 31. At $100 per pay, Nationwide says, the difference would be $177,143.

“The difference is more than just added accumulation, of course,” the analysis says. “It represents the effect of compounding, the process in which an asset’s earnings are reinvested to generate additional earnings over time. All other things being equal, the more time a saver allows their assets to grow, the more compounded growth occurs. The growth can become exponential.”

According to the survey, workers are broadly aware of the power of compounding, and many say they are simply unable to save more and save earlier. More than half (61%) say debt has negatively impacted their retirement savings, from credit card debt to mortgage debt and student loans. Nationwide says workers also face higher costs for big-ticket items, which are rising faster than the overall inflation rate.

“For example, homes cost more,” the analysis says. “In the first quarter of 2018, the median sales price of existing homes was up 5.8% over the same period of the previous year. Rising interest rates and home prices have driven up mortgage rates and depressed affordability. Many potential buyers are also renting longer which is causing rents to rise at the fastest pace in two years.”

In addition, those who wish they could save more point to the rising costs of child care and health care.

Actions to take now

According to Nationwide, virtually all employees who are not already doing so, should start contributing to a retirement plan immediately. Those facing debt payments must also prioritize long-term savings, as difficult as this may seem.

“Employees may be able to reduce their student loan payments, accept a slightly later payoff and contribute the difference to their retirement savings account—allowing compounding more time to work,” the analysis says. “Individuals could reduce their monthly saving for a house down payment and contribute the difference to a retirement account. Doing so would delay reaching the down payment, but potentially only by several months rather than several years. Meanwhile, the saver would kick-start their retirement savings.”

Among other examples, the analysis considers a theoretical employee who is paying $500 a month on a 10-year, $35,000 student loan that charges 6% annualized interest. The terms of the loan require a minimum payment of $390.

“By repaying more than the minimum, she will save $10,594 in interest and cut the payoff period by 1.80 years,” the analysis says. “Or, she could contribute $55 per pay ($110 per month) to her retirement account by reducing her loan payment to the monthly minimum. In doing so, she would accumulate $16,267 for retirement over the 10-year period while paying $10,594 interest, a net savings of $5,673.”

The analysis also encourages younger workers to think about funding a health savings account (HSA), should their employer make one available.

“Let’s consider a hypothetical example of an employee capitalizing on the HSA triple tax advantage,” the analysis says. “Saving $20 per pay ($40 per month) into an HSA, he could have $26,920 after 30 years. If the employee increased his savings to $50 per pay ($100 per month), that amount could grow to $67,301. By increasing to $65 per pay, the employee could have an additional $40,000 of tax-free dollars—more than $100,000 total—to help pay out-of-pocket health care expenses that may arise in retirement.”