When you are in your 20s or early 30s, retirement seems like a distant concept. Many young adults are preoccupied starting and building their careers, paying off student loans and maybe even starting families.
It’s easy to put retirement on the back burner.
Millennials have been presented with a unique set of challenges and opportunities, says Jason R. Staley, investment relationship manager at Schneider Downs Wealth Management Advisors in Pittsburgh. The “lack of wage growth and uncertain job markets, combined with significant amounts of student debt and the likelihood of social safety net programs like Social Security and Medicare being less generous to millennials than baby boomers, create an uncertain economic future,” Staley says.
[See: 8 Tips to Invest in Your 30s.]
Here are seven tips to help millennials get started on the road to retirement.
Take advantage of compound interest. Starting to save money when you are in your 20s and 30s puts time on your side. Here’s a basic example: Every dollar invested today, earning 6 percent for 30 years, compounds to be about $5.74 in the future, says David Brinkman, investment relationship manager at Schneider Downs Wealth Management Advisors in Columbus, Ohio.
It’s critical to teach millennials that they only have one compound growth curve in their lifetime, says Josh Jalinski, president of Jalinski Advisory Group and host of the Financial Quarterback radio show in Toms River, New Jersey.
“With compound interest, their dollars will double over time, meaning the earlier you begin saving, the more ‘free’ money you will earn,” he says. “If you wait until you’re older to get serious about retirement, you have already lost many years of compound interest potential.”
Creating a plan can help you succeed. “By not planning for retirement they are planning to fail,” Brinkman says. “Failure includes the inability to live a lifestyle in retirement that is below their current lifestyle expectations, or having to work much later into their life to overcome starting retirement savings later.”
Put your money to work. Cash doesn’t pay. “I recently met with one millennial who had an excellent income and savings rate, but she had over $100,000 in cash that was earning absolutely nothing,” Jalinski says. “We created an action plan for her to start earning interest, diversify her strategies and insure her future. I find that millennials are very open to getting help and are good savers. They just have too much cash on hand and lack a properly disciplined financial plan.”
Understand the importance of stock returns. Some millennials are very risk averse, and increasingly acting more like their grandparents did when it comes to money, Jalinski says. “Many millennials are very protection-minded and have no money with market exposure.”
Millennials may have a reason to be gun shy of the stock market. They saw their parents take big hits in 2000 and 2008. “According to industry surveys only 20 percent of millennials described the stock market as the best way to save for the future,” Brinkman says. “In addition, a Brookings Institute study noted that 52 percent of millennials had their savings in cash versus 23 percent for savers in other age groups.”
Historical long-term average returns for the U.S. stock market have been around 10 percent. Many market watchers expect lower returns in the future, but stocks still offer the opportunity to grow your money over time, unlike cash or low-yielding Treasury securities.
[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]
Use computer software to make projections. “We use visualization software that employs calculators and other programs to help millennials see what their life would look like if they became disabled, if they kept their money in cash earning just zero to 1 percent at the bank, or if the market crashed,” Jalinski says. “On the other hand, the software also helps visualize positive developments, like what would happen if they saved 15 percent of their income, took full advantage of their employer 401(k) match or focused on generating compound interest. This helps them zero in on what they need to do to properly prepare for a comfortable retirement.”
Use technology to your advantage. “Apps like Mint, Personal Capital and Intuit can help them identify cash flow and where they can plan and stick to a budget,” says Adam Ciepiela, vice president at Charles Stephen in Albuquerque, New Mexico. “Financial planning software like eMoney and Money Guide Pro can help make the plan full and visible to them. Robo-advisors have made it easy to gain access to investments cheaply and efficiently.”
Make retirement saving a priority. Even while you pay off college loans, saving for retirement and earning compound interest should always come first, Jalinski says. “It is very possible that a future president could forgive student loan debt,” he says. “I always tell clients that, because of the political uncertainty of college loan debt, they should focus on saving for retirement and building a comfortable nest egg.”
Bump up your savings amount. The millennial group is not properly preparing for retirement, Brinkman says. “The median savings rate for millennials is 3 percent, whereas most industry experts forecast they should be saving between 5 percent and 15 percent of their pre-tax income into their retirement accounts,” he says.
When it comes to retirement, there probably isn’t a thing as too much.
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
“Over saving in the early years allows for more flexibility in later years where saving maybe less manageable, practical, or possible,” Staley says. “The power of the early savings and compounding over a long time horizon gives people the best chance at achieving the kind of retirement they desire while minimizing the possibility of retirement ‘short-fall’ risk.”
Although retirement may seem far away and the appeal of living in the moment overpowering, millennials need to be laser focused on the future, Staley adds.
“Millennials will enjoy the significant advances made by prior generations in technology and medicines, but will likely not have access to the generous social safety nets that have provided support and funds for retirement like previous generations,” he says. “Millennials need to save early and often in order to increase the probability of having the retirement they desire.”
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7 Tips for Millennials Who Would Like to Retire Someday originally appeared on usnews.com
