Q. My wife and I are recent graduates, in our early 20s, fairly new to the workplace and new to having paychecks. The company we both work for offers a 401(k) plan in which we will be eligible to participate beginning January of 2015. The plan offers a 5 percent match. We know we should begin to save for retirement, but the most we think each of us can put away is $250/month. If we didn’t go out for $10 to $12 lunches every day, we could probably save more, but we really enjoy going out with other co-workers our age, not to mention the hassle and expense of packing a lunch! Does it make any sense to begin a 401(k) with this small amount of money, or should we wait until we can make a more meaningful contribution? Our friends/co-workers are leaning toward waiting, but we wanted to ask for your opinion.
A. Thanks for asking. What a good question. First of all, $500/month isn’t chump change, especially if you are in your early 20s. If as a couple you save $500 a month plus the $25 match for 40 years (a total investment of $252,000) and achieve an 8 percent rate of return, you will have accumulated over $1.8 million. If you wait 10 years to begin investing, you’d need to invest $1,229/month or a total of $442,712; and if you wait 20 years to begin investing, you’d need to invest $3,111/month or a total of $746,777 to achieve the same result 40 years from now.
You might think it will be easier to save more money as your career develops, but that isn’t always the case. One of you could lose your job. If you have children, raising them is expensive. If both of you continue working, you’ll have the expense of day care, and if one of you decides to stay home, the loss of one paycheck will impact your ability to save.
If the friends/co-workers you hang out with are about the same age as you and your wife, chances are that your financial situations are similar. If you’d all eliminate the expense of one or two lunches a week, each of you could put at least another $40 to $80 a month in your 401(k). Using the assumptions above, for you two, this brings your account to over $2 million in 40 years. I’d like to challenge you and your friends to brown bag (an old-fashioned term for bringing your lunch from home – they have neat coolers now) at least one lunch a week for two months, and see if it isn’t just as much or more fun than going out every day. You could make it a contest to see who can come with the most-appealing lowest-cost lunch. It doesn’t have to be a hassle to make lunch, is probably more healthy than eating out, and should cost less than $3.
Here is an example to help get you started: I recently bought two packages of chicken tenderloins at a BOGO sale for a total cost of under $6.50. Each package had 8 tenderloins, so cost per tenderloin was under 41 cents. Assuming you’d eat two at one meal, your cost is 82 cents. One evening after work, preheat your oven to 425 degrees, line a cookie sheet with foil, spray with cooking spray, place the chicken on the tray, spray the chicken and season (mayo and Parmesan cheese, a variety of spices or mustard and Worcestershire are some of my favorites). Place in the oven until juices run clear – about 15 to 20 minutes. Prepare pasta, vegetables, etc., while the chicken is baking; once done, have dinner. After dinner, use plastic wrap and package chicken in individual servings and store in a freezer bag for lunch sandwiches, salads, etc.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624