Millennials have less of a safety net than the generations before them. In fact, retirement will be different for millennials than it is for the baby boomer generation. Student loan debts — coupled with the fact that they lived through a recession and face higher-than-average unemployment and job insecurity rates — mean that retirement is not something millennials can take lightly. It has gotten to the point that 61% of millennials plan to work at least part-time during their retirement to supplement living expenses.
However, just because you’re young doesn’t mean you can’t put money away for retirement. Understanding modern retirement and knowing a few tips can help you put away enough money to enjoy a comfortable retirement so you can relax instead of working during your golden years.
Financial Obstacles Facing Millennials
The modern financial landscape presents unique challenges for millennials to overcome when they’re trying to retire. Millennials are hesitant to invest, and the new retirement issues they’re facing make it harder than ever to choose how to invest. When you’re investing your hard-earned money, you want to make sure that you’re making informed decisions about where best to put that money.
However, investing is not the only obstacle that millennials face for retirement. Many millennials are also faced with financial problems such as:
- High student loan debt;
- Increasing housing prices;
- The rising cost of living;
- Stagnant wages;
- Job insecurity;
- Credit card debt;
- Less pre-retirement earnings going into Social Security.
Millennials are having a difficult time saving for retirement due to these (and other) financial setbacks. What’s more, these economic issues show no signs of slowing down.
The Importance of Saving for Retirement
One of the most important reasons to save for retirement is that you will need money to live once you stop working. You may also need money to pay for medical expenses, and you may want to travel or enjoy your golden years in other ways.
Saving for retirement is important because it will allow you to maintain your standard of living after you retire. It’s also a good idea to save for retirement because you may not have a pension or other income sources to rely on once you retire — unless you want to work during the years that are meant to be spent relaxing, vacationing, and living out your life.
How Millennials Can Start Saving for Retirement
To start saving for retirement, you’ll need to set up a plan that will help guide your decision-making. It’s essential to prioritize your financial needs and consider which accounts you will use to save for retirement.
You should also think about how much money you can contribute each month or year and the type of savings and investments that make sense for you. Anyone, including millennials, should carefully consider the following steps for a comfortable retirement.
Start Small, but Start Now
Millennials and younger generations should start saving for retirement as soon as possible. In many cases, financial advisors and economists suggest that you should start saving for retirement at around the age of 25.
Saving early is a good idea because you’ll earn compound interest. Compound interest is a type of interest that accrues on an investment’s initial principal and the accumulated interest of previous periods. This allows an investor to earn interest on both the original investment and on the interest it has already generated.
Compound interest is a powerful tool for retirement savings because it helps investors build up their account balances over time. This means that an investor can earn more money from their retirement savings account than if they had just put the money into savings. Overall, compound interest can help reduce the time it takes to retire.
For example, suppose you earn yearly compound interest on an initial savings of $5,000 with no contributions, with an assumed interest rate of 5%. After 40 years, this leads to an account balance of $35,199 — over seven times the original investment. The balance will be even more significant if you contribute to this account.
While you may not have $5,000 to invest, it is vital to start contributing anything you can as early as possible to start earning compound interest. Additionally, it’s important not to overextend your finances into a retirement account. You still need to be able to pay your other living expenses — hence start small, but start now.
Use Your 401(k)
A 401(k) is a retirement savings account that is a popular option for many people — especially employees. The money you save in this account is not taxed until you withdraw it. Many employers offer this type of account, and employees can contribute a certain amount of their paycheck to the account each month.
You can invest the money saved in a 401(k) in several ways, including stocks, bonds, and mutual funds. This allows employees to have a degree of control over how their money is invested and the potential for growth over time. Additionally, many employers offer matching contributions to their employees’ 401(k) accounts, which helps employees earn even more money for retirement. Millennials should take advantage of their employers’ matching contributions to maximize their savings.
Open an Individual Retirement Account (IRA)
Compared with a 401(k), an IRA is a retirement savings account tailored more for individuals rather than employees. This account also allows individuals to save money for retirement and to receive tax benefits on their contributions.
There are two main types of IRAs: a Roth IRA and a traditional IRA. Your contributions to a Roth IRA are not tax-deductible. However, the IRS doesn’t tax your withdrawals once you’re retired. Conversely, contributions to a traditional IRA are tax-deductible, but the IRS taxes funds you remove from the account in retirement.
Many employers offer matching contributions to their employees’ 401(k) accounts but do not offer matching contributions to their employees’ IRAs. Additionally, IRAs can include a range of investments beyond contributions from a person’s salary; for instance, you may invest in real estate holdings as part of an IRA, or you may wish to hold precious metals through your IRA, in order to net a broader portfolio and less risk exposure.
A person may want to choose an IRA over a 401(k) if they are ineligible for the 401(k), if their employer does not offer a 401(k), or if their compensation is lower than the limit required for a 401(k) (as an IRA has no income limit).
There are a few reasons why someone might want to have both an IRA and 401(k). Individuals may want to maximize their retirement savings, or they may currently have a 401(k) already and have just found that they are eligible for an IRA.
Automate Retirement Savings
It can be tough to remember to contribute money to a retirement savings account when you receive your paycheck, and it can be even more challenging to figure out how much you would like to save.
To help with this process, try setting up scheduled savings transactions in which a certain amount of money is withdrawn from your checking account and deposited into your IRA or 401(k) each month.
This will ensure that you are saving for retirement and will make the decision to save less daunting. This is an easy way for millennials to start small, but start now and contribute.
Stash Away Extra Cash
If you currently have a savings fund, consider adding any extra money that you receive (such as bonuses, income tax returns, or revenue from a side gig) to your retirement account. Increasing your regular investments incrementally is more valuable than periodically contributing a large sum. This is because compound interest yields higher earnings for regular investments than you’ll see with one-off contributions. However, large contributions can help you catch up if you are behind on your retirement.
Look, Don’t Touch
You should monitor your retirement account to see how it grows, but refrain from taking out any of this money until you retire. If you are tempted to withdraw all of the money in your retirement account before retirement, be aware that there can be penalties for doing this.
Again, it’s essential to assess your finances to understand how much you can regularly contribute to your retirement account. Make sure you still have enough money to pay for current living expenses and live comfortably.
Unless you want to work or borrow money instead of relaxing, it is essential to consider paying into your retirement right away. Understanding precisely what to do with your money is not always easy, but the information covered above can hel impact the lifestyle you will have in retirement.