8 Retirement Tips for Millennials
A Pew Research Center report found that millennials had invested more money in their 401(k)s than Gen-Xers at the same age. Likewise, 71 percent of millennials saved through employer-sponsored plans. But questions remain: will millennials be able to retire at 65 — or earlier — as they increasingly hope? How much money will millennials need to retire?
Here are a few retirement tips for millennials to help answer these questions.
1. Build a budget — and stick to it
Many people pay bills by writing checks until their money runs out or until the next paycheck arrives. However, financially savvy people keep a budget that allocates their monthly assets well before bills are due. That strategy can help you save. If you know, for example, that you have $300 in your account earmarked for credit card debt, it can help you resist expensive purchases that may put you over that limit. Sure, it takes willpower to stick to a budget, but it's a financial planning for millennials strategy that's well worth it.
2. Get out of debt
Few experts would say that prioritizing getting out of debt is a bad financial move. Many millennials face significant debt, mainly in the form of student loans. Credit card debt and mortgages or rent also play a role in millennial financing.
Regular, steady payments are critical here. If you can afford to pay off your credit card each month, doing so can help keep you from getting bogged down with high balances and will help improve your credit score.
3. …But don't put off saving for retirement
Yes, getting out of debt with regular payments is essential. But when considering millennial retirement savings, one of the best steps you can take is to begin saving now while you're young, so that compounding can work in your favor.
How do you do that with limited funds? Consider renegotiating the minimum payments for your student loans or consumer debt. When those smaller payments give you a little extra cash, immediately allocate it to retirement savings.
4. Don't depend on social security
Where will millennial retirement savings come from? Increasingly, millennials say they're not counting on social security to be a significant source of income in retirement, as it's been for the baby boomer generation. Although it's difficult to predict the country's financial situation in 20 or 30 years, the retirement outlook for millennials should include multiple sources of income. This possibly includes—but is not limited to—social security.
5. Explore your employer's savings options
One of the retirement tips that may be most useful is to look at what savings option your employer offers. The rock-solid pensions that your parents relied on are less common now. Still, millennial retirement savings options in the form of defined-contribution plans, such as 401(k)s, are utilized increasingly by millennials to stash away savings. An employer will often match employee contributions up to a certain amount.
This is a can't-miss way to beef up your savings. If, for example, your employer will contribute up to 4 percent of your salary to match your contribution, it's worthwhile to set up and contribute that amount regularly to have access to that free match.
6. Make saving automatic
As the first truly digital generation, millennials are comfortable handling their financial lives online. Millennial retirement savings is an area where this can make a difference. Instead of stashing away money when you happen to have it — say, from a tax refund windfall — set up an automatic deposit into a savings account or other savings vehicle, so money is transferred monthly, without any action. There's no risk of forgetting a month, and you won't even miss the money after a while. Even a tiny amount can make a difference.
7. Diversify savings with an IRA
As a millennial, you're young enough to have several decades ahead of you to manage and augment your savings. Retirement for millennials, on average, will begin in the early 2040s, when the first millennials turn 60. That gives you time to develop multiple vehicles for savings. So begin by taking advantage of your employer's 401(k) plan.
It's also wise to consider opening an IRA to provide you with one more element in your millennial retirement savings plan.
There are two types of IRA: Roth, where you contribute after-tax income, allowing you to make tax-free withdrawals after retirement; and traditional, where your money grows tax-deferred, to be taxed at a hopefully lower basis after you retire. Millennials can contribute up to $6,000 a year, meaning that you could have a nice nest egg by the time you retire and begin taking withdrawals.
8. How much do millennials need to save to retire?
There are many answers to this question as there are financial experts, but a good general rule is to assume you'll need about 80 percent of your pre-retirement income annually. Your children should be independent by then, and your mortgage likely paid off. On the other hand, you may have increased medical costs to handle. It's difficult to predict the retirement outlook for millennials, but the sooner you can begin your savings plan, the better you'll be in the long run.
The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.