ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Thursday, January 18, 1996 TAG: 9601180068
SECTION: BUSINESS PAGE: B-7 EDITION: METRO
DATELINE: NEW YORK
SOURCE: Bloomberg Business News
Taped to David Capodilupo's computer are the innards of a fortune cookie, the kind Putnam Investments' retirement educations consultants give out at seminars designed to enroll new employees into 401(k) plans: ``You will spend old age in comfort and material wealth.''
Investment firms don't need Confucian wisdom to see the huge U.S. market that is Generation X - defined as the group somewhere between the ages of 20 and 32, depending on the demographer. Participation in 401(k) plans have jumped to about 75 percent for young adults from about 50 percent in the 1980s, said Jim Gatley, Vanguard Group director of individual investors.
Chalk it up to a feeling of insecurity. According to a recent survey conducted by Roper-Starch Worldwide for Kemper Financial Services, 81 percent of Generation Xers believe their Social Security contributions will not be there for them when they retire. That's compared to 71 percent of Baby Boomers, the much larger group of adults born between 1946 and 1964.
Viewing Generation X as a market ripe for harvest, major financial service companies have drawn up new strategies to garner the fresh crop of investors. Putnam Investments' ``Circle of Success,'' Merrill Lynch & Co.'s ``Next Generation'' and The Vanguard Group's foray onto the youth-populated Internet computer network are all aimed at young adults.
Of course, there's a big difference between smart money and smart marketing. ``Most brokers do their classes to pick up clients,'' said Dorothy Lebeau, a financial planner who teaches ``Building Your Wealth: The Early Years'' at the University of Pennsylvania. ``This isn't brain surgery, but it's made out to be much more complicated then it need be.''
Understanding two of the more common retirement plans - 401(k) and IRA - is a good start. A 401(k), also known as a salary reduction plan, pools employees' pretax earning to invest in such financial instruments as stocks, bonds and money markets.
The earning power of a 401(k) is that contributions reduce reportable income and, along with it, the year-end tax bill. How much of that contribution can be deferred from tax depends on the employee's income level and eligibility. Interest, dividends or capital gains returned by those contributions then accumulate without the hindrance of taxes until the nest egg is withdrawn.
According to the Profit Sharing/401(k) Council of America, it works something like this: A 25-year-old becomes a millionaire by age 65 by putting $300 a month into a 401(k) plan at an average 8 percent rate of return. The 35-year-old who waits 10 years and cuts those saving years by 25 percent collects less than half as much - about $450,000.
Individual retirement accounts offer the same advantages of tax-sheltered compound interest and tax-deferred salary but exclude the benefits and drawbacks of group investing. Taxpayers can reduce their taxable income by as much as $2,000 a year by stashing it in a personal IRA account and managing the investments themselves.
A hypothetical IRA model set up in an Oppenheimer's ``Quest for Value'' newsletter shows the power of investing young. Investing $2,000 a year in an IRA at an 8 percent annual return would result in $58,649 after 15 years, $157,909 after 25 years and $244,692 in 30 years.
While the Internal Revenue Service will let IRA funds grow untaxed until withdrawn, shifting restrictions have confounded taxpayers since Congress created the IRA in 1974. Today's restrictions disallow 401(k) participants from reducing their taxable income with an IRA contribution, for instance, while still allowing $2,000 annual contributions.
Offering more flexibility than 401(k) deductions made automatically, IRA contributions are allowed throughout the tax year and into the next, as long as they're before the taxpayer files a federal return and don't exceed $2,000 per tax year.
Not that all Xers are focused on the future. Nearly two-thirds of Xers say they enjoy spending money more than saving it, compared with 55 percent of Boomers and 39 percent of those over age 50, according a retirement survey released by Putnam last week.
LENGTH: Medium: 76 linesby CNB