How to talk to your college grad about saving for retirement

Retirement planning can be a tough sell to someone in their early 20s.

But it’s critical to have this conversation early on with your soon-to-be working child. Time is everyone’s biggest ally when it comes to saving for retirement. The sooner they start saving, the better off they’ll be in the long run.

Whether you’ve been saving for years or you wish you had started earlier, your personal experience is a valuable teaching tool. Sharing both your successes and mistakes will help them understand the importance of starting early and saving on a consistent basis.

Here are some helpful tips to engage your child in a productive conversation on retirement.

1. Acknowledge the challenge

Start the conversation by acknowledging the financial challenges that come with starting out after college. Entering the workforce and finding your footing financially can be tough. Many young adults face tight budgets while adjusting to new responsibilities like rent, paying student loans, bills and handling everyday expenses.

Empathize with your child as they navigate this shift. It can feel overwhelming to balance their current needs with future goals. It’s important that you understand the challenges they face so that you can offer practical advice that is realistic to their current situation.

Next, explain to them that planning for the future doesn’t mean abandoning the present. Through good budget management, they can set aside money for "fun" and "future" expenses. Fun money obviously needs no explanation, but let your kids know how getting started on saving for retirement early is a smart financial move over the long term.

If they’re unsure how to balance it all, you could offer to go over your child’s budget with them to show how their expenses, fun money, and future money can coexist in real numbers, not hypotheticals.

2. Show the power of compounding

Sure, you could tell your kids all you want about the importance of saving for retirement. But they might think that it's something they will do when they're a real adult — when they have a family, a high-paying job, and a big house. Besides, “Retirement is decades away, there’s plenty of time,” they’ll say.

You need to create a sense of urgency. Time to show them how compounding works. Consider these three scenarios of starting to invest each month with 7% annual rate of return that’s compounded annually.

The following examples are hypothetical and for illustrative purposes only and do not represent the performance of any investment. No taxes are considered in the calculations. It is possible to lose money investing in securities.

These examples illustrate the importance of time when it comes to investing and compounding. Compare Scenario A to Scenario B. Starting $250 monthly contributions at age 25 results in more than $315,000 in additional retirement savings by age 65 than starting them at age 35. Total contributions for Scenario A are only $30,000 more than Scenario B. This highlights the positive impact of starting early.

Also compare Scenario A to Scenario C. Despite doubling the monthly contributions to $500 per month at age 35, the total amount by age 65 for Scenario C is still less than Scenario A. Additionally, total contributions for Scenario C are $60,000 more than Scenario A. This illustrates the challenge of trying to catch up on retirement goals when you’re older.

For more examples using custom criteria for your retirement age, savings contribution, and rate of return, try out our Retirement Planning Calculator.

3. Manage their expectations

The concept of saving for retirement might be so foreign to your kids that they have overblown expectations on how to do it. Ease their minds a bit. Focus on how simple it is to get started and adjust along the way.

For example, with a 401(k) through work, they can likely pick from a couple options of investments, set their contribution rate — a specific dollar amount or percentage of their yearly salary — and then forget it for the time being.

As their career progresses, they can make adjustments to their contribution rate over time. The important thing is to get started. They can always revisit their strategy and make any appropriate changes down the road.

4. Open up to your kids

Your new college grad is likely going to have more financial responsibility than ever before. How can they balance saving for retirement with rent, student loan payments, vacations, concerts, and everything else?

That's where you can help. By now, you’ve probably outlined your dreams for retirement, so share those aspirations with your child. Let them know your goals, fears, when you want to retire, and your financial experiences. Did you save for retirement when you were their age? Would you go back and do anything differently? These conversations can be powerful lessons for your kids.

Once you get them thinking about what their retirement could look like, they'll be more inclined to take saving for retirement seriously and prioritize it accordingly.

The bottom line

Remember, this conversation shouldn’t be a lecture; make it an open and honest discussion about the importance of saving for the future. And don’t forget to make it fun! Retirement is an opportunity to live out your hopes and dreams; sharing your aspirations can be a bonding experience with your child where you each learn something new about each other.

At the end, you’ll want them to feel good about taking an active role in their financial future. Once you do that, they’ll be on the path toward making smart money decisions as they enter the next phase of their life. To continue learning about investing, retirement planning, and more, explore our financial planning education and resources from Citizens Wealth Management.*