For older members, saving money for retirement might be a top financial priority. In comparison, younger members may not be thinking much about retirement planning — however, it's never to early for younger members to start saving for retirement.
Here's how unions can help members get a head start on their retirement preparation.
Explain the Different Retirement Accounts
Evaluating retirement accounts can be intimidating, especially to younger workers who are relatively new to the workforce and may not be familiar with them. To help your members wrap their heads around their options, explain the types of retirement accounts and what each of these involves.
Many members probably have access to employer-sponsored accounts. These include 401(k) plans, which for-profit companies offer, and 403(b) plans, which are offered through government organizations and nonprofits.
You can strengthen your case for starting retirement planning early by noting that these plans usually allow account holders to make contributions directly from their paychecks. Explain that members can choose to contribute a percentage of their earnings. If members have employers who offer matching contributions, encourage them to contribute enough to get the full match. Otherwise, that's money left on the table.
Help younger members understand the basics of how pensions generally work. For one, both employees and employers contribute to a pension plan. Pension payments are determined by two things: how long the employee has worked and their annual income.
You can also point out that an employee usually needs to work for a certain number of years before their contributions are fully vested, meaning they own 100% of both their employer's and their own contributions. If they leave the company and aren't yet fully vested in their account, the employer might be able to keep some or all of the benefits of the pension.
Individual Retirement Account (IRA)
IRAs can bolster a nest egg without requiring members to go through an employer. Instead, they can open an account on their own.
There are two types of IRAs: Roth and traditional. Though the yearly contribution limits are the same for both — $6,000 if you're under 50 in 2020 — the timing of the tax benefits is different for each account. With a Roth IRA, the account is taxed the year the members makes the contribution, so they'll enjoy the tax savings later. Traditional IRA funds are only taxed at the time of withdrawal, so members who contribute will reap tax savings now.
Point Out the Power of Compound Interest
Younger members tend to have different financial priorities than their older colleagues. Covering everyday expenses, paying off student debt or even just enjoying themselves in the here and now may drown out the needs of 40 years from now.
To motivate younger members to start saving for retirement early, show them how much more their money can grow if they form good habits now. It can provide a powerful incentive to get them to save for their golden years.
For example, say that a member started saving for retirement at age 25. If they tucked away $200 in an account every month until they reached 65, then at a 7% interest rate that's compounded annually, they'll have $685,798 for retirement.
Now, say they waited 10 years before they saved anything. Even if they saved $300 a month for 35 years to catch up, at a 7% interest rate, they would only have $497,653.
As they say, it's not the timing of the market that matters, but time in the market. The longer money stays in a retirement account, the more it can grow.
Provide the Right Education
Investing for retirement presents no shortage of head-scratching jargon. To help your younger members feel more comfortable with the terms, tips and requirements they'll have to navigate, consider inviting a retirement specialist to facilitate an informative session, either on-site or via a remote webinar.
The specialist can prime members on different types of accounts and their features, and offer pointers for making the most of their savings, whatever route they choose. They'll also be able to answer specific questions and provide additional resources.
Much like saving for retirement, the earlier a union board prioritizes financial retirement education, the more of an effect it is likely to have. Make it a part of your agenda to protect pensions and tax-advantaged accounts for your younger members — with access to the right tools and education, they'll be able to lay a strong foundation for the future.
Jackie Lam is a personal finance writer who has written for both Fortune 500 companies and fintech startups. In a former life, she worked in the communications department of an entertainment labor union. Now a full-time freelancer, she enjoys helping fellow freelancers build a successful business.