An average American will work for 47 years and spend about 20 years in retirement. If a millennial starts saving money in a 401(k) plan at age 30, considering the average life expectancy of an American citizen is around 78, they will have to save for 48 long years. This number might give you a little fright, but it wouldn’t be a cause of concern if you wisely spend down the money you have saved during the retired portion of the number.
In this guide, we’ll discuss why retirement planning needs to be a priority for millennials, how to approach the intricacy of saving and investing, and offer actionable strategies to grow wealth and retire rich.
Why Millennials Should Consider Retirement Planning Today
Thinking you will be able to shift the retirement on the sunny days of your life is a wishful way of thought. Wanting dollars to be waiting for you when you hit 67 won’t help too.
Many Americans step into the workforce with a student debt in their 20s. Early milestones such as moving out of parents’ house adds to the complexity of finances which actually require you to focus on side hustle or seek a proper full-time job for millenials.
As you would expect, post-covid the average retirement savings are devastatingly low, as people seem to be living from paycheck to paycheck. Also, the inflation has worsened these financially challenging post-covid scenarios leading to even higher burden of debt.
We see how younger generation is stressed about spending money. Bank’ spending notifications and apps help keeping track of subscriptions and services saving users money instantly increases savings, which isn’t shocked, serves better value in the future.
Easier said than done, as the parents’ golden years are coming with losses their trusted financial institutions have been fabricating. For Parenting like this, expecting a caring retirement from your children is rather financially naive.
Timing means everything. You cannot rely on taking a loan post retirement while barring a credit card out of five as essential to life during working hours. Saving needs to start earlier, money stacks up making you richer without working on returns jumping further amplifying the effect removes the liability for debt.
Save money for the things that are a need, take children along on vacations to create memories to help them relate the struggle and story of their parents.
Here are a few Millennial-focused insights on why planning for retirement should begin as early as possible:
Compound Interest: With compound interest, your funds increase significantly within a period of time. Investing at an earlier age allows for more time to accrue wealth.
Unpredictable Future: Benefit plans for most employers are not as dependable these days, and Social Security does not guarantee the same level of assistance as it once did paying for pensions. It is important to have a backup plan to help you in critical times.
Inflation:
The increase in cost of living will take value from the money you have saved. A headstart provides better opportunity in the race against inflation.
Longer Life Expectancy:
Millennials could spend 30 years or even more in retirement due to increased life expectancy. You would require a bigger retirement corpus so that you do not exhaust your savings.
Increasing Healthcare Costs:
Retirement does not mean that one has to stop taking care of themselves. People invest in policies while they are still active in work.
Steps to Start Retirement Planning Now
Understanding why having an early planned is crucial, let us explore some actionable techniques that you can use to work towards a successful retirement.
- Define How Much You Will Need For Your Retirement
Saving for retirement requires calculating an estimate of how money will be needed. Money necessities diverge based on several factors like personal lifestyle, location after retirement, future dependents, etc.
Planning to sustain a predefined expense ratio of 70% to 80% of pre-retirement income is encouraged; however, this rough rule of thumb needs to be modified per the individual’s unique circumstances. Guessing goals using retirement calculators is feasible too, however, these numbers should be altered as shifting financial milestones are targeted.
- Make the Most Out of the Sponsored Retirement Plans
For most millennials, employer-sponsored retirement plans such as 401(k) accounts offer tremendous retirement saving potential. Value addition to them is also is enabled by employer contributions, other than matching funds. These provide unparalleled benefits also known as complimentary funds towards securing one’s future.
For example, if your employer has a 100% match on contributions up to 5% of your salary, make sure you’re contributing that much. Anything under the full match is effectively free money being left on the table. The younger you are when you start contributing, the more the benefits of compounding interest work in your favor. It’s not just the interest you earn on the initial amount, but the interest on the interest that will add up as time goes by.
Tax benefits apply to 401(k) plans. A traditional 401(k) allows you to make contributions before tax, which reduces your taxable income. In this account, your investments will grow with tax-deferral, meaning you don’t pay taxes until you withdraw in retirement. On the other hand, Roth 401(k) account holders make contributions with after-tax dollars, but withdrawals are tax-free in retirement. Each method has its advantages and disadvantages depending on your current tax rate and expected tax rate in retirement.
- Set Up an IRA (Individual Retirement Account)
Alongside retirement programs offered by employers, Millennials should look into Individual Retirement Accounts (IRAs). In addition to IRAs, there are other tax-advantaged accounts that can help foster the growth of retirement savings. IRAs are classified as two main types.
With Traditional IRA, you can deduct contributions from your taxable income, and your funds grow tax-deferred. You can withdraw the funds in retirement, but that means paying taxes on them at that time.
Roth IRA:
Tax contributions are made, yet account growth and withdrawals are exempted from taxes during retirement.
Roth IRAs do come very handy for Millennials because it lets you grow your funds without being taxed at all. This is beneficial for those expecting to change to a higher tax bracket after retirement, but currently enjoying the privileges of a lower one.
IRAs have a contribution cap of $6,500 per annum for those below the age of 50 (as of year 2023). However, it is possible to increase this limit as you age. Note that there are income restrictions to contribute to a Roth IRA, so ensure you’re aligned with the IRS rules before proceeding.
- Saving Towards Automation
The most effortless method to engage in retirement-related planning is to keep scheduled savings. Create payment schedules which transfer a directly set amount from your checking accounts into your retirement savings accounts (401(k), IRA, etc). That way, you spend without worrying about saving for the future. In addition to this, setting up scheduled contributions to your savings accounts means you will have to save first before spending, which is ideal.
Every income earner should strive to pay themselves 15% of their paycheck before anything else, and many professionals suggest starting with that number. While this might feel extreme, It’s important to set achievable benchmarks early in the saving process, as that makes the journey far easier. If 15% starting savings feels difficult, it is always possible to increase contributions later as the income rises.
- Make Investments
There is no better time to grow 401(k) savings than when there are decades to spare before retirement age. Planning investments might sound auxiliary, but it’s actually one of the most helpful savings tips, as there are numerous methods you can incorporate without intricate planning.
Risk Mitigation:
Cross-invest in various investment vehicles like stocks, bonds and property to protect your investments and save with ease. This way, you will eliminate reliance on any single asset for retirement saving.
Stock Purchasing Funds:
For Millennials too busy with work to monitor individual stocks, these funds are a superb alternative. For a low fee, these funds provide broad market exposure, automatically purchasing shares from various companies to track market indexes like the S&P 500.
Risk Tolerance:
Since retirement is many years away for you, as a millennial, your risk tolerance may be higher. This means that you can afford to invest in more volatile assets, such as stocks, which yield higher returns over time. That said, it is still necessary to review your portfolio from time to time and manage your risk exposure as you age.
Dollar-Cost Averaging:
This strategy requires investing a fixed sum of money at equal time intervals, no matter the market situation. This minimizes the risk of trying to time the market and reduces the adverse effects of volatility.
- Pay Off Debt With High Interest First
While planning for retirement, one must first focus on paying high-interest debt like credit card balances. It will be of no use savings for retirement when there is credit card high-interest debt that need settle. So remove high-interest debt as it grows rapid and slows your pathway to wealth. First the focus is on high-interest debt and after settle the switch to savings.
Once the high-interest debt is settled, more shift can be made towards saving for retirement. Which, in turn, means more funding will be available for investment improving one’s overall health.
- Construct an Emergency Fund
Just as you map out a plan for retirement, you should create an emergency fund as well. If you want to ensure a retirement savings plan stays on course, having safety nets to catch unexpected expenses like medical emergencies, job loss, and car breakdowns is an absolute must. Financial professionals usually suggest socking away 3-6 months of living expenses into a liquid account that is easy to access, like a high-yield savings account.
Creating an emergency fund allows you to build your focus towards long-term financial goals, and reduces worries stemming from matters beyond one’s control.
- Contemplate the Future of Social Security
There are mixed views about whether or not Social Security is going away anytime soon. While many believe it won’t vanish in the near future, worries over its longevity cast a shadow. Furthermore, it was initially designed to supplement retirement savings, and does not function as the primary source of income.
How much you will get from social security is directly tied to your earnings and the number of working years accumulated. For millennials, there is a high likelihood they will receive less than what previous generations did, especially considering the fact that the system is struggling to fund itself.
Because of this, don’t rely too much on Social Security, as it is best considered a supplement to your retirement income. Make sure that you are building additional savings and investments.
- Stay Flexible and Adjust Your Plan
Your life will change, and so will your retirement plan. Changing careers, getting married, having kids, and unexpected financial difficulties are only a few of the reasons that you should always review your retirement plan. Increase contributions to your retirement savings as your income increases. Significant life changes may force you to adapt your strategy in order to get back on track.
Your retirement goals should also be adjustable. If everything is going to plan and you’re set to retire early, great. If not, don’t worry. You have the ability to make changes to your plans and increase your savings in order to get back on track.
Retirement planning is akin to running a marathon rather than a sprint. Starting early is key, as you will have more time to make the most out of compound growth. However, for Millennials, wealth building requires a smart skill set, discipline, and adaptability. It’s vital to participate in employer-sponsored retirement plans, open is an IRA, pay down debt, invest, and most importantly, be consistent with your savings.
All said and done, the most critical point is start now. Removing barriers and preparing strategy as soon as possible ensures your future is secured. Rest assured, with goal discipline and structured planning, these milestones will help yield a fulfilling retirement.