One of the key differences between Millennials and their parents comes down to savings and retirement. Whereas Gen-Xers and Boomers tend to view savings as sacrosanct and retirement as a reward for spending the majority of their lives in the workforce, Millennials are often criticized for their minimal or nonexistent savings (a 2015 survey by HowMuch.net revealed over 50 percent of Millennials have less than $1,000 in savings) and seem less likely to wait until theyre 65 to enjoy life. Many shoot for a location-independent job straight out of college that will allow them to travel and enjoy a great work-life balance while theyre still young. A growing number of Millennials are even starting to envision lifelong careers for themselves – not out of necessity, but rather out of passion for their chosen occupations.
That said, retirement planning is relevant for all generations – even Millennials. And given their youth, Millennials have plenty of time to ensure they have a nice nest egg in their twilight years – whether they choose to keep working or not. Here are five simple but effective ways for Millennials to start planning for their retirement now:
- Save early and often. This may sound clichéd, but its never too early to start saving for your retirement. Starting with your first job out of college, begin socking away a percentage of your income before it goes to any other expenses – including your regular bills. Frequency is key, so be sure to allot a portion of EVERY paycheck to your retirement nest egg. Resist the temptation to dip into your savings, even if its for essentials like rent or groceries. (If you build a savings component into your monthly budget, you shouldnt have to.)
- Bite the bullet and invest. Saving is crucial, but it probably isnt enough to provide for a comfortable retirement. Given their exposure to the Great Recession of 2007-2009, Millennials tend to distrust the stock market more than Gen-Xers or Boomers. But if you want your money to work for you, youll have to get over any hang-ups about investment risk and expose yourself to the leverage of the US Gross Domestic Product (GDP). Its carried every other generation to retirement over the last 100 years; and since the Depression, there has never been a consecutive 20-year period where the stock market hasnt gone up. Plus, Millennials have a good 30 to 40 years before they reach the age of retirement – so a lot of the day-to-day volatility of the stock market will be a non-factor for them. When it comes to an investment strategy, be patient and keep it simple. Try going with one balanced fund or target-date fund instead of picking eight mutual funds and trying to chase returns.
- Meet your 401(k) match, but put the rest in a Roth IRA. Many employers offer a 401(k) matching program to their employees. In most matches, your employer contributes 50 cents to a dollar for every dollar you contribute to your 401(k) – usually up to six percent of your salary. But if youre planning a decent retirement, youll need to save a lot more than six percent of your salary each year. So put enough into your 401(k) to qualify for the full match (hey, its free money), and use the rest of your savings to fund a Roth IRA.
A Roth IRA has two main advantages for Millennials. While the money you contribute to a 401(k) isnt taxed now, all withdrawals in retirement are taxed at high income rates. Roth IRAs work in reverse: You get no tax deduction for your original contributions, but withdrawals after age 59 and a half are tax-free. Your income will in all likelihood be significantly higher in your late fifties than it is in your twenties or early thirties, so your tax rate is likely to be higher, too – making the back-end tax break more valuable than the front-end one. The second advantage a Roth IRA offers to Millennials is flexibility. Should an emergency force you to withdraw your original contributions from your IRA before you reach the age of 59 and a half, you wont have to pay a 10 percent early withdrawal penalty – or income taxes – the way you would with a 401(k). Nor will you be charged a penalty if you dip into your Roth IRA to cover your childs higher education expenses.
- Cover your bases. A crucial part of retirement planning involves protecting yourself and your family from the unexpected. That means having sufficient health insurance, long-term care insurance and life insurance. Sure, the premiums can get expensive, but theyre worth it. Without the proper coverage, unexpected events like accidents, illnesses and death can obliterate your retirement in the blink of an eye. Term life insurance is the most affordable way to protect your family in the event that something happens to you or your spouse. SelectQuote can help you find the right policy for your needs at a price that fits your budget from a collection of leading life insurance companies – at no cost to you. To get started, click here or call 1-855-872-1266.
- Have faith in financial advisors. Just as a sizable portion of Millennials dont trust the stock market in the wake of the financial crisis, many tend to dismiss financial advisors. But this could prove to be a big mistake if they take retirement planning advice from their parents (or other inexperienced parties) instead. As well-intentioned as they might be, the parents of most Millennials have a pension plan to retire on. Moreover, most have never dealt with the early financial setbacks that plague many Millennials and can impact their retirement savings, such as student loans or credit card debt. By contrast, financial advisors have a heritage of experience and expertise when it comes to retirement planning that transcends market fluctuations and a bad economy. They also have a vast knowledge of financial products, interest rates and risk that is likely to supersede that of your parents or peers.