
Everyone plans to stop working eventually. For most people, retirement has some...
by Webster LuptonIf you’re a millennial planning for retirement, it may feel like time is getting away from you. Take a deep breath because you’re not too late to the game.
Life comes at you fast. One minute you’re in your mid-20s, juggling work, school loans, car payments, and relationships. The next thing you know, you’re looking into the future without a penny in savings.
Sure, we have Social Security, but will it still be there in 25 years when the first millennials start to retire? Even if it is, will it be enough to fund the life you want?
If you want a fantastic future, now is the time to start saving. It isn’t as daunting as it may seem. Our 6-step retirement planning guide helps millennials like yourself set goals, set up accounts, and take advantage of compounding returns.
Millennials (people born after 1980 and before 2000) have a few unique characteristics that can affect retirement planning:
With the above factors in mind, we’ve planned out how millennials like yourself should prepare for retirement. Here are six steps to ensure you dial in your financial security.
The first step is simply to begin. Whether you’re a mid-career 40-year-old or a 20-something just out of college, you should start saving as soon as possible.
A good plan today is better than a perfect plan tomorrow. Retirement planning and investing are just like any other skills – get started and learn along the way.
You’ll inevitably make mistakes and adjustments, but that’s normal. The important thing is to get started.
Time is the key factor in retirement planning.
We can argue all day about portfolio diversification or the merits of actively managed funds, but none of it matters compared to the power of compounding returns.
Even if you’re starting late, aggressive investing can help make up for lost time – but only to a degree.
All things being equal, the person who starts earliest will be better off. But no matter how late you start, sooner is always better.
Once you’ve decided to take responsibility for your retirement, the next step is to establish specific goals for your retirement.
The current standard retirement age is 67, but you can technically retire whenever possible.
Your time horizon might affect how you invest, so the main takeaway is to have a clearly defined plan.
Once you have a target date, you can figure out how much money you’ll need.
General advice suggests maintaining 70 to 90 percent of your pre-retirement income, which can vary based on your specific goals.
It isn’t easy to accurately plan 40 years into the future. Things will change.
Thinking through a plan and pivoting as needed helps you gain the knowledge, skills, and experience to adjust as you face life’s challenges.
Now that you have clear retirement goals, your next focus should be strong financial discipline to meet those goals.
Student loans, mortgage payments, vacations, cars – there’s no end to life’s financial demands. But to achieve your retirement goals, you need to prioritize savings. Don’t wait until you have extra cash to spare. You must pay your (future) self first.
High-interest debt (e.g., credit cards) is like negative savings. Whatever you save is wiped out by monthly interest payments. Do everything you can to eliminate this debt as soon as possible, then shift those payments to savings.
Just because you make more money doesn’t mean you have to spend it all. If you were surviving fine before the raise, there’s no need to suddenly increase your cost of living. Use the extra money to increase your retirement savings and reach your goals faster.
This simple money management rule suggests using 50% of your income on needs, 30% on wants, and 20% on savings and debt payments. That way, your retirement savings increases as you make more money throughout life – while still having money left for living.
Now you have a clear goal and the discipline to reach it. Your budget is set, and you regularly have money to save and invest. Next, you need to set up accounts to hold your retirement savings.
These are special bank accounts designed for retirement purposes. Unlike typical bank accounts, funds contributed to these accounts get subtracted from your taxable income, which reduces your current tax burden. They are then taxed upon withdrawal, but the idea is that you’ll be making less money in retirement, so you’ll pay less tax overall.
And unlike a pension, you can keep these accounts as you change jobs and progress through your career. Also, these accounts have contribution limits because the taxation conditions are so favorable – a good indicator of a good deal.
Most employers sponsor some form of retirement account to make up for the loss of a pension system. Plus, companies will usually match a certain percentage of what you contribute. That’s free money! Always max out your employer-sponsored accounts first.
IRAs don’t require employer sponsorship. If you’ve already maxed out your employer-sponsored account and still have money to invest, using an IRA is best.
If you withdraw funds from these accounts before you turn 59 ½, you’ll have to pay a 10% penalty plus the taxes. So, contribute as much as you can, but not more. It’s better to be conservative with your contributions than to get stuck, unable to meet your current obligations.
First-time investors often need clarification on the difference between retirement and investment accounts. The accounts described above are just special bank accounts that let your money grow. It’s still up to you to invest the funds in those accounts.
Your main investment goal is to maximize long-term growth, take minimal risks, and avoid fees and other expenses – all without spending hours per week managing the process.
Remember, you’re not a day trader. You’re not trying to squeeze value out of daily market fluctuations. Instead, you’re buying investments to hold them for years or decades.
You can fill your retirement accounts with just about any kind of investment you want, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more.
In general, we recommend investing in ETFs that passively track indices. They let you ride the market’s 10% historical average returns without the large fees and management hassle.
Generally, it’s wise to take on more risk when you’re younger, then reduce risk as you near retirement. If stocks crash when you’re young, it’s usually a buying opportunity.
If they crash a year before retirement, it could be a disaster. That means shifting funds from more volatile stocks to stable bonds as you strat to reach your goal retirement age.
Once you’ve set your goals, developed financial discipline, established your retirement accounts, and bought your investments, you’re on your way to a financially secure future. At this point, all you need is a way to monitor your progress to ensure you stay on track.
If you just have one retirement account – a 401(k), for example – the easiest thing to do is use the built-in tracking tools available from the account provider. It will likely provide all the necessary information to stay up-to-date with your investments.
Tracking becomes more challenging when you start adding more accounts. To save time and avoid extra hassle, you should use a consolidated portfolio tracker to monitor all these accounts from a single platform.
We hope this guide helps you better understand the unique challenges of retirement planning for millennials. In some ways, this age group has it more complicated than in the past, but there are also some benefits.
Tax advantages, stock market access, online tools, and more all give millennials more control over their retirement savings than previous generations.
If you take control of your retirement planning now, you have plenty of time to build a financially secure future. Even for older millennials, there is still time to take advantage of compounding growth and have the comfortable and secure retirement you dream of.
Everyone plans to stop working eventually. For most people, retirement has some...
by Webster LuptonSingle parents deal with all sorts of challenges. Perhaps one of the...
by Ashley GrasseFamily trusts can provide several benefits for business purposes, tax optimization, or estate planning....
by Jonathan Anthony