Millennials just like every other generation want to have a comfortable retirement to look forward to. Saving for retirement has been particularly challenging for this generation because of stagnant wages, labor market volatility, and college's spiraling costs. According to JPMorgan's research, if a Millennial start saving at age 25, to retire at 67, they will need to save their pretax income like this:
4 to 9 percent of those earning a median income
9 to 14 percent of those earning an affluent category
14 to 18 percent for those considered in the high net worth category
Retirement Planning for Millennials
Retirement strategies for millennials must include looking at the overall big picture. Getting out of debt must be prioritized so that more saving for retirement can occur. Student loans typically carry the lowest interest rates, and many millennials focus too much on paying those down faster. Credit cards can cost thousands of dollars on interest in not a whole lot of money. Paying down this debt faster makes a lot more sense than putting extra funds toward a student loan debt.
Since many Millennials have started their adult lives to make less money than previous generations, personal finance must be prioritized. Living paycheck to paycheck is a cycle that must be broken. Creating a budget for retirement planning and following it is one of the best ways to get out of this risky situation. You will need a retirement budget when retiring anyway, so making it a habit earlier in life will make it stick.
The gig economy has created many part-time jobs that can supplement a Millennials’ income to help pay off debt, start an emergency fund, and save for retirement.
Saving for Retirement
Although many Millennials are lagging in retirement planning, the key is just to get started and put away what you can. Here are some investments to include in your retirement strategies below.
One of the Best Retirement Plans: 401K Investments
A 401k is a “qualified” retirement plan, which means that it's eligible for special tax benefits. 401k investments are an employer-sponsored retirement plan that you can invest a portion of your salary into, up to a certain limit. Some employers will match part of your contribution, so ideally, you should invest at least as much as this amount.
Individual Retirement Accounts
IRAs are accounts that allow individuals to save for retirement with tax-deferred or tax-free growth. Traditional IRAS uses contributions with money before taxes and will grow tax-deferred until you start withdrawing. They are usually best for those who believe they will be in a lower tax bracket in retirement.
A Roth IRA uses contributions with money that you’d paid taxes on. That means your money will grow tax-free when you withdraw it as long as you meet certain conditions. If you believe you will be in a higher tax bracket upon retirement, a Roth IRA is usually one of the best retirement plans to choose from.
Investing in stocks has been made more accessible due to technology. Other than finding the best retirement plans, there are tons of resources to get you involved with the stock market. Using apps like Wealthfront, LearnVest, and Acorns, millennials can learn, select their stock investment, and grow their accounts.
Retirement Tips for Millennials
Creating a retirement budget isn’t going to help quite yet in your life. Retiring is still many decades away, but keeping retirement top of mind will help millennials be successful. Retirement tips with the millennial in mind include:
Building a saving habit - Even saving $25 a week will make a difference over time. Prioritize saving and live below your means to help curb expenses. When you’ve paid off a loan or gotten a bonus, put that money away instead of spending it.
Maximize tax deferrals - Automatically contribute into qualified tax-deferred plans like 401ks, so those pre-tax dollars work harder for you. Make sure you pay attention to the fees and keep your costs low. When you switch jobs, roll your old employer plan into another qualified plan to avoid penalties.
Utilize an HSA - Health savings accounts use pre-tax contributions, grow tax-deferred, and be sued for qualified healthcare expenses without paying any taxes. If your employer offers them, be sure to take advantage of them. Don’t forget to roll them over with you when you change employers too.
About the Author
Anjana Paul is a banking professional who is passionate about helping others make better choices when it comes to money. In her spare time she is a freelance writer with years of expertise in the financial industry. She primarily writes about topics such as student loans, building credit, budgeting, retirement and other personal finance topics.