Everyone plans to stop working eventually. For most people, retirement has some...
by Webster LuptonThe Ultimate Guide to Millennial Retirement Planning
If 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.
What is Unique About Millenial Retirement Planning?
Millennials (people born after 1980 and before 2000) have a few unique characteristics that can affect retirement planning:
- Higher job mobility. Previous generations might have spent their entire career with a single company, then retired with a pension. Millennials rarely have that option. Instead, we’ll likely work for many different companies throughout our careers.
- More financial options. Millennials have access to information, technology, and financial tools previous generations couldn’t dream of – and a lifetime to leverage these tools for retirement purposes.
- Higher student loan debt. Inflated education costs mean millennials start life with a greater debt burden than their predecessors, which can delay retirement savings. How can we worry about retirement when we still owe 50k for school?
- Less delayed gratification. As millennials grew up experiencing several major financial upheavals, we tend to want experiences and purchases now rather than later. That usually means less money saved and more credit card debt.
6-Step Retirement Planning Guide for Millennials
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.
Step 1: Start Now
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.
Your Plan Will Get Better
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.
Compounding Returns
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.
Better Late than Never
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.
Step 2: Establish Goals
Once you’ve decided to take responsibility for your retirement, the next step is to establish specific goals for your retirement.
Set a Retirement Age
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.
Calculate Financial Needs
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.
Be Ready to Adjust
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.
Step 3: Develop Financial Discipline
Now that you have clear retirement goals, your next focus should be strong financial discipline to meet those goals.
Prioritize Retirement Savings
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.
Avoid High-Interest Debt
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.
Avoid Lifestyle Creep
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.
Use the 50/30/20 Rule
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.
Step 4: Set Up Retirement Accounts
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.
Tax-Deferred Retirement Accounts
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.
Employer-Sponsored Tax-Deferred Accounts
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.
- 401(k). This is the standard retirement account sponsored by most large companies (you can’t open one yourself). If you change jobs, you can transfer it to your new company, move it to an IRA, or leave it where it is. Either way, it’s yours to keep.
- SIMPLE IRA. The Savings Incentive Match Plan for Employees – Individual Retirement Account (SIMPLE IRA) is similar to a 401(k) but for smaller companies. It follows similar rules, including mandatory contribution matching requirements.
- TSP. The Thrift Savings Plan (TSP) is the government version of the 401(k). It offers most of the same benefits – but it’s only available to government workers. State governments offer similar programs.
Individual Retirement Accounts (IRA)
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.
- Traditional IRA. Funds from a traditional IRA are tax-deferred, just like a 401(k). The current contribution limit is $6500 per year, but you can add an extra $1000 if you’re over 50. Withdrawals get taxed as regular income, not capital gains.
- ROTH IRA. The difference here is that contributions come from post-tax income. The benefit is that you won’t pay additional taxes when you withdraw the funds. Contribution limits are the same as for traditional IRAs.
- Health Savings Account (HSA). This account is specifically for medical expenses but is essential to a retirement portfolio. They are another tax-deferred account where you can stash money to reduce your tax bill.
Beware of Early Withdrawal Fees
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.
Step 5: Invest Your Money
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.
On Long-Term Investing
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.
Common Investments
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.
Adjust Risk Over Time
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.
Step 6: Monitor and Track
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.
Tracking With Individual Accounts
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.
Consolidated Portfolio Tracking
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.
Use This Guide As a Millennial Retirement Checklist
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.
