Retirement Planning for Millennials: Why You Should Start Now

Retirement Planning for Millennials: Why You Should Start Now

 

THIS ISN’T YOUR PARENT’S RETIREMENT PLAN

How are you feeling about the work ahead to save for a long and prosperous retirement? Many Millennials seem not to feel too optimistic about their abilities to save. In fact, 72% of Millennials are significantly pessimistic about it. Where does this pessimism come from? The idea of saving for retirement certainly didn’t plague our parents like this. But, of course, those were different times. Most parents of Millennials are part of the Baby Boomer and X generations, which were much more confident in their retirement plans. They relied on their employers to do most of the work of saving for them through employer-sponsored pension programs, which are not commonly found today. The evolution of independent retirement accounts resulted in more pressure to save by the individual versus the company. Here are some other factors working against Millennials saving for retirement that parents simply didn’t face:

  • Higher student debts to pay off
  • Raising interest rates on loans
  • The Great Recession
  • COVID-19 and mass job losses

Millennials

Let’s face it, some Millennials today are not thinking about what will happen to them when they retire at age 65. Especially in the current economy, with inflation eating up our extra cash, there’s little left to put aside for something so far off into the future. Financial hardships from the past few years have taken a toll on retirement accounts, with over one-third of Millennials feeling behind in their retirement savings goals. Thankfully, there’s still time to think about, plan, and save for your later years. However, the sooner Millennials start saving for retirement, the more likely they will have a nice nest egg to live from with little financial worry later in life. In this blog, we’ll explore the realities of Millennials planning for retirement and tips for strategizing and taking action that will pay off in the years to come.

The Power of Compounding

The sooner Millennials start saving for retirement, the greater their savings will be in the future. This statement is true because of the power of compound interest. Savings and investment accounts pay interest, and when that interest is reinvested into the account, it can also earn interest in the future. This ongoing process creates a snowball effect called compounding. For example, if Jenny invests $10,000 in a savings account that pays 2% interest each month, here is how her account will grow.

Month Balance Interest Earned 1 $10,000 $200 2 $10,200 $204 3 $10,404 $208.08

Each month, Jenny earns more interest because her account has grown in size. And so, the earlier you start saving for retirement, the faster your money will build.

The Reality of Social Security

When you receive a monthly paycheck, a portion is taken from your earnings as a tax paid to the government’s Social Security program. This money is then paid to people no longer working due to retirement, disability, or survivors of deceased workers. Most workers understand that the money you pay into Social Security will someday pay you back when you retire. While Social Security is nice to have during retirement, Millennials should plan that they won’t be able to live off of Social Security alone. The amount you earn through Social Security will vary and could be anywhere from 27%-75% of your pre-retirement income. Suppose you need around 70% of your pre-retirement income to live a similar lifestyle you were accustomed to before retirement. In that case, you can see that Social Security alone isn’t going to fulfill your needs. It will be essential to have additional retirement savings or income to support activities throughout your golden years.

START WITH GOALS

Some people accumulate more than $1 million in savings for their retirement years – how much will you need? Setting realistic savings goals based on your imagined retirement lifestyle is an excellent place to start.

What Do You Imagine?

Start by envisioning yourself in retirement. Where are you living? Do you have hobbies, travel plans, or family to care for? Understanding how you will live helps to know how much you need financially to maintain a particular lifestyle.

Financial Obligations

Next, make a list of all of your planned expenses and financial obligations. These expenses include housing, food, healthcare, taxes, and travel costs. Remember to factor in inflation as you calculate totals – we know firsthand how this can impact daily living.

Set Specific Goals and Prioritize

We often hear clients who have planned vacations of a lifetime, such as traveling around Europe for a year or taking weeks-long cruises to explore places they’ve never been. These types of excursions take some planning… and saving. If you have a goal for retirement that will be financially impactful, write it down; if you have several, prioritize them.

Set Savings Milestones

Track progress toward your savings goals by structuring them in more achievable milestones. What will your first savings milestone be – $100,000? How long do you anticipate it will take you to save that much? You’ll ultimately feel better about your progress by giving yourself small victories along the way, which is why we recommend the milestone method.

The three most common retirement savings options available to Millennials are 401(k)s, IRAs, and Roth IRAs. Let’s explore each of these.

401(k)

The 401(k) is your employer-sponsored retirement savings plan. The benefit of this type of plan is that contributions are made pre-tax, which means the money is taken out of your paycheck before it is taxed. Many employers will offer to match employee contributions into a 401(k) plan to help you build your retirement savings more quickly. This type of plan will grow tax-free until it’s time for you to withdraw.

Traditional IRAs

A traditional IRA is an individual retirement account that can be set up with a provider of your choice. Your contributions to a traditional IRA are tax-deductible and will grow tax-free until withdrawal. Unlike 401(k)s that usually have a limited number of investment options, IRAs offer a broader spectrum of investment possibilities, such as stocks, bonds, mutual funds, and more.

Roth IRAs

Roth IRAs are similar to Traditional IRAs in that they are individual retirement accounts that can be set up with a provider of your choice. They also have a wide variety of investment options to diversify your earnings. Where they differ, however, is that Roth IRAs are funded by after-tax dollars, which then allows you to withdraw tax-free when the time comes to do so.

With all retirement plan options, it’s important to understand their rules, contribution limits, and withdrawal eligibility. We recommend consulting with a financial advisor for these finer details.

MAKE SAVING EASIER

If you’re not currently in the habit of setting money aside each month for retirement, then it could take some time to adapt. Here are some tips to help you make saving for retirement a little easier.

Now’s Your Time, Millennials

We know that it’s hard to think about saving for years into the future when you may feel financially strained today. We get it. But, the feeling of financial strain will hopefully pass and we want you to enjoy your retirement because you’ll have earned a break. Financial challenges are always going to be around, but choosing to look past them toward the future is the best way to release yourself from lifelong worry.

A financial advisor like Suzuki & Associates has your back. We’re trained and trusted to help our clients make the best financial decisions for today and the future. We can help you plan, strategize, and research investment options that make the most sense for you. We’ll never advise you to do something you’re uncomfortable with just so we can make a commission – that’s not in our DNA. So, don’t be a stranger – reach out and schedule a consultation today!”