A Twenty-something’s Guide to Retirement Savings
Clear debt. Build emergency savings. And make a habit of saving money. Admirable priorities to help you start successfully planning for retirement, right? But, seriously. Retirement? For millennials like you, that distant life stage may not top your list of financial goals.
You may want to give to a favorite charity. Or deliberately wait to save because you believe that graduate degree you want is worth the student loans. Maybe you’re eyeing an engagement ring or planning a wedding. There are countless reasons to allocate your money in buckets that don’t have the “Retirement Savings” label.
Yes, every young adult has different situations, different passions, and different income levels. But here’s what you have in common with your fellow millennials: decades until you retire. That means you have time. Not time to procrastinate, but time to potentially grow the money you save. Here’s how to take advantage of it — before the years tick by.
Change Your Thinking
You’re not so different from the students in Texas A&M University professor Christopher Moore’s retirement classes. Even though they’re economics or business majors already interested in the world of finance, he says they still have a hard time conceptualizing the long-term advantages they have when it comes to saving for retirement.
As his students cover the material in his retirement class, however, they come to understand the “time value” of money: “The longer time you have to save, the more money you’ll have.” Simple to say, but harder to put into practice.
Assistant professor Sarah D. Asebedo at Texas Tech University says students in her financial planning program grasp the concepts and have lots of training in the subject, but she agrees that the challenge for them becomes “turning that knowledge into action by saving.”
“Behaviorally, we tend to focus more on short-term needs, so it can be hard for 20-somethings to think of the long term when they have a tight budget and potentially, a lot of debt,” Asebedo says.
Asebedo urges this generation to think of saving as a discipline or a good habit, rather than worrying about how much they’re putting aside. “Saving just $5 or $10 a week establishes the habit of saving that can be ratcheted up over time,” she says, adding that a good goal for 20-somethings might be to save at least 10 percent of their gross income annually.
Feeling better? Make saving a habit. That’s doable.
Retirement Saving: Step by Step
Here’s the thing: You won’t have any money to invest in stocks or bonds or to fund retirement down the road if you run up overwhelming debt now or live paycheck to paycheck. So aim for a balance between saving responsibly and managing a realistic day-to-day budget.
To kick-start the process with retirement in mind, Moore urges young professionals to:
1. Take advantage of employer-sponsored retirement plans, such as a 401(k) in the corporate world or a 403(b) at nonprofits or in the educational realm, especially if your employer offers matching funds. Otherwise, you’re leaving money on the table.
2. Pay off consumer debt, including student loans.
3. Save for an emergency fund — about three to six months of living expenses. That way, a car repair or plane fare for a death in the family won’t derail financial goals.
4. Pay into savings/retirement accounts and 401(k) plans as if they were any other bill or obligation. “You will grow accustomed to doing without that portion of your earnings, and it will become easier to save,” Moore says.
5. Seek out a certified financial planner who specializes in young professionals. “Their fee structure is more suited to individuals who are just starting their careers, and they can really help guide you in your specific situation,” Moore says.
Investing 101
Super-motivated young investors might consider investment vehicles such as a Roth IRA. As you start your career, your salary will likely be under the Roth IRA income caps (modified adjusted gross income [MAGI] of $118,000–$133,000 for single filers; MAGI of $186,000–$196,000 for married, filing jointly). The advantage of a Roth IRA is that you can contribute money that’s already been taxed, give it the potential to grow over time, and then take distributions in retirement, including any earnings, tax-free. Boom!
As you dabble in the stock market via a 401(k), Roth IRA, or other investment ventures:
- Find out your risk tolerance on the scale from conservative to aggressive, using internet tools (check out this quiz) or by talking with a financial planner.
- Allocate assets accordingly.
- Stick with your plan.
- Reallocate as life circumstances and income levels change.
“There’s an adage in the industry: It’s not timing the market, it’s time in the market,” Moore says. “Don’t try to get in and get out at strategic times; stay in it for the long haul.”
Getting a Head Start
Taking action in their 20s will put millennials ahead of peers who don’t — and help ensure a stable lifestyle decades down the road. “Overall, saving for retirement should be considered a ‘fixed expense,’ just like housing or groceries, as those ‘savings’ dollars will provide the income necessary to pay for future housing, food, and hopefully some fun!” Asebedo says.
Parents — don’t wait until your children are working their first job to teach them how to save. Use our guide for instilling financial responsibility in the digital age.
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