By Olivia Morley
Navjot Panchhi says he applied to as many as 700 full-time jobs since graduating in May 2020 with an applied physics degree from the New Jersey Institute of Technology.
Panchhi found a few contract jobs, but is still looking for a full-time role. He says if he had a full-time job with benefits, he’d invest money in a 401(k). Right now, he’s putting what extra money he earns into a savings account.
Unemployed graduates lack access to employer-sponsored 401(k) retirement plans and are less likely to save for retirement than workers who have these benefits. Delayed saving affects long-term financial health, but alternatives to the 401(k) can help workers with a few extra dollars to invest.
Recession graduates, set back for a decade
Panchhi is one of many recent college graduates who couldn’t find full-time work after graduation – or any work at all.
Just 63% of 20- to 29-year-olds who received a bachelor’s degree in 2020 were employed by October 2020, down from 76% the year before, according to the Bureau of Labor Statistics.
Between March 2020 and March 2021, payroll and benefits provider Gusto found young workers experienced termination rates 79% higher than older generations, said Gusto Economist Luke Pardue.
Recessions impact recent graduates’ long-term financial health, experts say.
Graduating in a recession “can affect long-term assets and wealth accumulations [students] otherwise would have had,” said Brad Hershbein, senior economist at the Upjohn Institute for Employment Research. “They generally do find employment, but it’s not necessarily the right job for them, and they spend a decade trying to catch up to where they otherwise would have been.”
Without access to employer-sponsored 401(k) retirement savings plans, workers are less likely to invest in retirement, according to an August 2021 report by the TransAmerica Center for Retirement Studies.
“People who are less likely to be offered a plan are also more likely to be working part time, so there are other factors driving the savings rate,” said Catherine Collinson, CEO and president at the Transamerica Center for Retirement Studies.
The cost of putting off saving can be significant, leading to lower income at the age of retirement.
“It’s called ‘labor scarring,’ meaning you don’t get on a ladder fast and you lose an early boost in payment,” said Teresa Ghilarducci, a retirement expert and professor of economics at the New School for Social Research.
A worker who makes $50,000 per year and saves 10% of their income at the age of 23 with an employer match up to 3% will accumulate approximately $1.7 million by age 65. Compare this with a worker who delays saving until age 30, who will accumulate just $1 million, according to NerdWallet’s retirement calculator, assuming a 6% rate of return.
“The wealth gap in this generation, or for individuals here at this point in time, is going to be highly correlated with their employment prospects,” said Nicole Smith, research professor and chief economist at Georgetown University Center on Education and the Workforce.
How to start saving without access to an employer-sponsored retirement plan
If you don’t have an employer-sponsored retirement plan, you still have options.
If you can find part-time work while you continue searching for a full-time job, or if you land a contract position, you can open an IRA.
IRA’s are alternatives to 401(k)’s that allow workers to invest money for retirement up to a set annual amount, and workers with any earned income can open one.
And for part-time workers who are in low tax brackets, a Roth IRA is a better choice than a traditional IRA because Roth IRA contributions are taxed at the time of contribution.
In 2021, the yearly cap on investments for workers under 50 is $6,000 dollars. But it’s important to open an IRA with the right broker, experts say – a discount broker who charges investors little to no fees.
Ghilarducci recommends Vanguard.
“I recommend getting a part-time job so you can be seen in the IRS’ eyes as a worker, and then you can save very straightforwardly in a Roth IRA at Vanguard,” said Ghilarducci. Vanguard’s advisors have a fiduciary duty to act in investors’ best interests.
If you are doing contract work on the side, there are more alternatives.
Self-employed workers who have registered for a sole proprietorship can open a Solo 401(k) or a SEP IRA, said Lori Atwood, certified financial planner and CEO of FearlessFinance, a tiered subscription-based service for young adults that offers yearly financial planning sessions.
Dave Goodsell, executive director at the Natixis Center for Investor Insight, recommends young people seek financial advice, if they can.
Often, investors have higher expectations for returns than financial advisors, which can lead to emotionally-charged decisions, like fleeing the market after a downturn, said Goodsell.
Negotiating pay will also help graduates get savings back on track
Recent graduates can avoid long-term consequences to their financial health if they can negotiate a higher starting salary, experts say, assuming higher wages lead workers to contribute more to retirement plans.
“We are seeing in a tight labor market companies are adjusting their wages,” said Vicki Salemi, career expert at Monster.
Wages in the professional services industry increased from $20.36 in March 2020 to $24.24 in September 2021 for 20- to 24-year-olds, according to Gusto platform data.
“Starting pay is going to be high,” said Ghilarducci. “A young person looking for work should be prepared to bargain heavily for that starting pay.”