Retirement savings tips for Millennials
Hey Millennials—raise your hand if you’ve started a retirement savings account. If you have, you’re not alone. A recent study reported that when Millennials, characterized as being born between 1979 and 2000, were offered a 401(k) retirement savings plan through their employer, there was a 72 percent participation rate . Congratulations! As a group, you started saving around the age of 22, more than a decade earlier than your Baby Boomer parents and five years sooner than your Gen X cousins.
It’s clear, you get the “retirement thing”—investing early and contributing appropriately. Here’s how it breaks down. If a fresh-out-of-grad-school 25-year-old saves $100 a month for 40 years, for example, he/she will have roughly $152,600 at age 65, assuming 5 percent annual returns. Compare that to a Gen Xer who began saving at 35 years old. In this example, the Gen Xer would have to contribute almost twice that amount each month to a retirement savings vehicle just to get the same result.
So, are you heading in the right direction? Here are some retirement savings tips Millennials can take advantage of.
4 retirement savings tips for Millennials
1. Pay yourself first
If your employer doesn’t offer a 401(k) plan you can participate in, start contributing to an individual retirement account, or IRA. If your employer does offer a 401(k) retirement savings benefit, find out if they also offer a match. If so, you’ll want to put in at least as much as what your employer will match so you don’t leave free money on the table. And remember, the more you contribute early, the better off you’ll be down the road thanks to compounding funds.
2. Start a rainy day fund
You’ve probably heard your Baby Boomer parents talk about the importance of a rainy day fund. And since their generation was born off the heels of the Great Depression and lived through the Great Recession, they know what they’re talking about. Having an emergency, no-risk savings fund, like a traditional savings account that’s separate from your 401(k), will help you protect your retirement nest egg and your overall financial future. Keep a balance of three to six months’ worth of living expenses in the account so you won’t be tempted to withdraw from a retirement account in times of hardship until you hit your golden years.
3. Live within your means
As a Millennial, you may just be starting to enter the workforce, and with all of this new income, it can be tempting to default to that “Treat Yourself” mentality. Instead of blowing your hard-earned cash on impulse purchases and things you don’t need, create a budget. Plan all of your savings and expenses out to ensure you are not spending more than you make. After saving for your retirement, adding to your rainy day fund, paying monthly bills, and depleting part of that pesky student loan balance, use the remainder of what you have left to live on. Budgeting ensures you know where each dollar of your paycheck goes, and after all, it’s best to spend what’s left after saving—not the other way around.
4. Invest wisely
Whether you’re at the upper end of the Millennial generation spectrum or you just entered the workforce, time is on your side. Create a long-term investment strategy, and as a general rule of thumb, invest as aggressively as you are comfortable with while you’re young for the possibility of higher returns. Consider adding pooled investments, such as mutual funds and EFTs, over individual stocks to reduce portfolio risk with instant diversification, and diversify investments globally. While we all love the good ol’ USA, considering both international and domestic investments across the various asset classes allows you to create a more diverse allocation.
Forming good financial habits early in life is a major key to ensuring you achieve the retirement you’ve always dreamed of. All of that traveling you want to do isn’t going to pay for itself, so set a budget, live within your means, contribute early, save often, invest wisely, and most importantly, own your retirement readiness!