Millennials, or those born between 1981 and 1996, aren’t as far from retirement age as you might think. Older millennials are now over 40. With full retirement age at 67, they may not yet be fully on track when it comes to saving for retirement, diversifying their investment portfolio, and reaping all the benefits now while they still can.
Here’s what millennials need to know about retirement planning.
1. Save now (even if you think you shouldn’t)
For something that seems so far away, it’s easy to put off savings and retirement planning. But the more you save now, the less stressed your future self will be.
You can do this through:
- An IRA. If you have nothing else, open an IRA account with a robo-advisor and make automatic payments to your account every month. Even $ 10 or $ 20, which seems small, can increase over time. You can use a traditional or Roth IRA – the biggest difference is how you get taxed. If you think you’re retiring on a higher tax bracket, choose a Roth IRA, which takes after-tax contributions and has more money in your pocket when you eventually start deductions. Otherwise, go with a traditional IRA, but keep in mind that your withdrawals will be taxed when it comes time to withdraw the money.
- A savings account. While dedicated retirement accounts are one of the best ways to increase your funds, they’re not the only way. You can also make incremental contributions to a high-yield savings account. The best savings accounts now offer interest rates above 1%, but this fluctuates with market conditions.
- Additional income. Do you get a bonus? Add it to your savings. Stop paying off a debt, like paying for a car or a student loan? Add those payments to your investment account. Have you caught a side hustle? Use it to pay off debt earlier and put some of it back into your retirement accounts. Big contributions are great but aren’t always feasible, especially when you have other obligations right now. Use what you have on hand to make smart little contributions.
Here’s how much you should have saved for each age.
2. Diversify everything you can
There is no way to save for retirement. You can have a work-sponsored 401 (k) and an IRA. You can have a taxable investment account and a high yield savings account. The more accounts you have, the more protection you are giving your future self.
This is because spreading your money across multiple accounts and securities is one of the best ways to safeguard your investments. Avoid putting all your money into a stock or asset. Instead, look for low-cost index funds, exchange-traded funds, and other investments that spread your money across multiple asset types like stocks, bonds, and real estate.
3. Reaping the benefits of the employer
If you’re lucky enough to have an employer match program with your 401 (k work sponsored), you can save even more for retirement now.
Employer matches vary widely from company to company, but it’s a good idea to check out potential employers for what they contribute to these plans. Two of the most popular types of matches are dollar-for-dollar matches and partial matches. Partial matches are when your employer matches contributions up to a certain amount. You may see that companies pay 50% of the contributions up to, say, 6% of the salary. Here’s what it looks like.
Suppose you earn $ 80,000 per year. If you contribute 6% of your salary, or $ 4,800, your employer would add $ 2,400 per year on top of your contributions. For 2022, all workers can contribute up to $ 20,500, while those aged 50 and over can contribute an additional $ 6,500. And any employer contributions add to these maximum contributions, up to $ 61,000 annually between the two contributions. That’s a big chunk that you can retire every year with the help of your employer.
You can also take advantage of other employer benefits, such as if they have a student loan matching program where your employer matches student loan payments each month, up to a certain dollar amount or percentage. This could help you pay off your debt earlier and spend more money on retirement savings.
4. Set regular goals
If you’re in the 40’s (or nearly 40’s) club and haven’t thought much about retirement, you have some time to catch up. Set yourself regular, attainable goals to achieve. For example, you can start by making small regular contributions to your retirement account. So you could increase those contributions in a few months.
You may also find other ways to maximize your savings. Let’s say you have a side hustle to help pay off the outstanding debt. Once the debt is paid off, you can use that income to top up your savings. It could be adding more money to your IRA or savings account. It could also cover the normal household expenses that your paycheck would normally cover and therefore you can increase your 401 (k) contributions as much as you can afford.
5. Don’t be afraid to adapt
Your goals don’t necessarily have to look like this, but setting and reviewing your retirement goals is important to ensure you’re on track to retire comfortably. Even if you aren’t fresh out of college like other people, you have more time than you think to get your retirement plan in order.
Think about how much money you need to retire that will last throughout your retirement. You can use a pension calculator to help you find the right number. Use your resources now to help you understand how to achieve that goal. For example, can you increase your contributions now with your current employer or look for a new job that has a strong match with the employer? Can you pay off your house before you retire or do you plan to downsize to save on expenses?
Your life at 70 won’t be the same as at 40, so it’s okay if plans change. Give yourself some grace and remember that it’s not bad if it doesn’t go according to plan. Have a backup (or two). Your retired self will thank you.
While retirement may seem a long way off, time is your greatest ally in achieving your goals. The important thing is to start today, even if it is small. You will give yourself time to get into the habit of saving and investing and thus a much greater chance of achieving your goals.
Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. In addition, investors are advised that the past performance of the investment product is no guarantee of future price appreciation.