The millennial population is on the rise, with approximately one-third of US citizens born between the 1980s and 2000s. As the largest generation, millennials are faced with their own unique challenges. Between poor economic conditions and student debt affecting 42% of families under 35, saving for retirement may seem difficult, if not completely impossible. But there is hope, and there are several ways you can set yourself up for financial stability well into your golden years.
Why Should Millennials Save For Retirement?
Millennials fall between the ages of 20-30. Most are just finally settling into a career after college, or recovering from the recession. While many are beginning their professional careers, it’s important to think about retirement as another stage in life that requires planning as soon as you reach adulthood.
Compared to previous generations, millennials are getting a late start in their careers, which has impacted their ability to build wealth, let alone save for retirement. But by starting early, the process becomes a lot less daunting (and less expensive) than saving when you’re 40 or 50 years old.
Even if you expect to work for the greater portion of your life, saving for your later years is smart in case there is an emergency or illness that affects your ability to work in the future.
Where Do I Start?
Getting started might seem like the hardest part, but not if you ease yourself into it. Millennials have received more post-secondary education than any other generation. Learning about retirement and the different options for saving can help you to get a head start on what might be the best choice for your financial future.
Explore the options available to you now. Many employers offer retirement savings plans or 401(k) plans. You may or may not already be enrolled. These plans work by contributing a portion of your income each month or year to a separate account. Other employers structure retirement savings by matching your contributions up to a certain percent of your income (e.g. Dollar for dollar on the first 3% or 6%).
401(k) contributions lower your taxable income for the year so you don’t have to pay as much income tax. Your funds are then taxed only when you withdraw them in retirement. If you ever leave your job, you retain the money you’ve contributed to your 401(k), and you may also retain the amount your employer has contributed as well if you‘ve been employed for a certain time period (known as vesting). Ask your human resources department about the options available to you.
How Much Should I Be Saving?
There is no magic number for how much to save per month or how much to contribute annually to your 401(k). It depends on a few factors, including your age, your income, when you want to retire, and how much you can afford to save while still making ends meet. A retirement calculator is a good place to start to get an idea of where you are now with your savings and where you want to be. When an employer is matching your contributions, try to defer as much as possible. The more tax-free savings you can accumulate, the better.
If your employer does not offer a retirement savings program, there are other personal retirement savings options you can look into, including:
Traditional IRA: A retirement savings account that allows you to contribute income (either before taxes or after taxes) that is tax deductible. Your savings are tax deferred, meaning you don’t have to pay taxes on them until you withdraw the funds at retirement, at which point it’s taxed as regular income.
Roth IRA: A personal retirement savings account where you contribute income, and your savings grow tax-free. While you must meet certain income requirements, the Roth IRA is beneficial because you don’t pay taxes or incur penalties when you decide to withdraw from the account.
myRA: Retirement savings program created by the Federal government.
State-sponsored retirement savings plans: Although fairly new in concept, several states are already adopting their own retirement savings plans.
When you have decided on the right type of savings account for you, set it up to automatically take money from your paycheck and deposit it into your retirement account. That way, you’re consistently saving each month without having to think about it.
What if I Have Student Loan Debt?
Thousands of dollars in student loan debt can feel like a huge burden. In fact, 56% of millennials between ages 18-29 put off retirement savings to pay off student debt. While lessening your debt load can be gratifying, it does put you behind on your retirement contributions. This can pose a problem if millennials come to rely on their personal savings for retirement.
It’s important to think long-term when devising a plan to pay off student loans and save for retirement. Although debt can be a weight, the sooner you start contributing to your retirement, the sooner you can start growing your nest egg.
Take a look at the following statistics to see how student debt impedes upon millennial retirement savings:
- Every dollar in student loan debt reduces your overall retirement savings by 35 cents.
- Student debt can end up costing college graduates $684,474 in lost retirement savings over a 50-year period.
If you find yourself saddled with debt but still wanting to contribute to your retirement, look into your repayment options. Prioritize your loans by interest rate and pay what you can each month. Additional income can go to your 401(k) or personal retirement account.
Consider adjusting your lifestyle as well. Are there areas where you can cut unnecessary spending? Evaluate your budget and living expenses to ensure you’re investing your income wisely.
Develop Smart Financial Habits Early
Millennials have faced several challenges during their formative years, including economic instability, rising tuition costs, and even increasing rent costs. While these hurdles may be a setback, they don’t have to be financially debilitating. Time is on your side and the sooner you start contributing, the more years you can add to your retirement. Financial freedom may seem like a distant reality, but it’s achieved by making wise financial decisions today.
When did you start saving for retirement?