07/21/97 GENERATION X: TO BE YOUNG, THRIFTY, AND IN THE BLACK

GENERATION X: TO BE YOUNG, THRIFTY, AND IN THE BLACK

Ann Farrell, a 28-year-old hydrogeologist, is one of the lucky ones. As a senior at Smith College in 1991, Farrell attended a seminar on investing early for retirement. ''I remembered the figures if you started saving when you were young,'' she says. Indeed, the payoff is huge. Through compounding, 25-year-olds who invest $2,000 a year and stop at 34 will earn $142,000 more by the time they are 65 than someone who begins investing $2,000 at 35 and contributes $2,000 each year for the next 30 years, according to T. Rowe Price Associates.
Farrell already has $22,000 in her 401(k). That's a nice start compared to most of her peers. Public Agenda, a New York-based market research firm, found that nearly 70% of polled adults aged 22 to 32 had saved less than $10,000 for retirement.
When Farrell was a new employee in 1991 at Roux Associates, an environmental consulting firm in Methuen, Mass., she was barred for a year from the company's Fidelity-managed 401(k) plan. Once eligible, she committed 8% of her paycheck in the two most aggressive stock funds offered (retirement growth and asset manager). The company matched 50% of her pretax contributions, up to 5% of her $28,000 salary.
Of course, it helped that her expenses were low. After graduation, Farrell--with only $500 to her name--moved back in with her parents, who charged her $200 a month for rent. She also traveled three out of every four weeks for work. ''There is nowhere to spend money on the road,'' she claims. Still, she had to repay a $10,000 school loan and a $4,000 car loan. She also wanted to build an emergency slush fund. Once she began making headway on these goals, Farrell moved to her own place and gradually increased her pretax contribution to 10%. Last year, she upped it to 13% (the maximum) of her annual salary, which has hit $40,000. The government allows employees to make a pretax contribution of up to $9,500 a year. Farrell is currently chipping in about $5,000 a year.
Oddly, the lack of growth in environmental consulting has worked to Farrell's benefit. While most GenXers find themselves job-hopping every two years or so to get ahead, Farrell stayed put because there wasn't much movement in her industry. So she will become fully vested in her 401(k) this October, after five years in the plan.
But Farrell hasn't exhausted all her retirement savings possibilities. Even though IRA contributions are fully tax-deductible only if a single person makes less than $35,000 a year ($50,000 for joint filers), Farrell can still benefit from the tax-deferred growth of the interest on her annual $2,000 contribution. For example, if she contributes $2,000 a year for 30 years, Farrell will earn $47,000 more in a nondeductible IRA than in a taxable account, assuming a 28% federal tax rate, according to T. Rowe Price Associates.
Farrell has done a lot right, but she has a long road ahead of her. When she makes her next move--she may leave her company and go to B-school--she needs to recognize the potholes that exist when protecting her retirement assets. For instance, if she decides to roll over her 401(k), she'll have to examine all of the investment options and rollover requirements. If she messes up, she could lose her head start on retirement savings.
Toddi Gutner