“I’m going to have to work until the day I die!”
For many millennials dealing with crippling student loan debt and stagnant wages, retirement seems more like a pipe dream than an eventual reality.
Current data also provides little hope; a new study projected new grads won’t retire until age 75 due to factors such as high student loan debt, rising rents, and a general fear of investing.
The good news? You can create a plan now to ensure that you do retire well before age 75 — and one that you’ll enjoy that doesn’t include eating cat food.
Saving For Retirement: Then and Now
In the past, baby boomers would work for the same company for decades, collect a pension, and retire at age 65. But in 2008, everything changed.
Boomers were getting laid off and seeing their entire retirement portfolios tank in the stock market. During this time, millennials were acquiring more educational debt than ever to pursue their own dreams. And when they graduated, the economy was in a recession with high unemployment rates and low wages.
Many millennials also had a front row seat to the demise of their parents’ retirement security. Because of this, the millennial generation is inherently distrustful of the stock market and has been hoarding cash instead of investing for the future.
While cash may seem like a safe alternative, most banks offer paltry interest rates that are likely not going to keep up with inflation. Investing can be a way to build wealth and beat the cost of inflation — unfortunately, many millennials are opting out of the system altogether.
if you want to retire some day, here are five things to know:
1. Paying Off Debt Should Be Priority No. 1
One of the best ways to prepare for retirement is to create a plan to get out of debt. Not paying down your debt in a timely manner can mean spending more money on interest — money that could be freed up to save for retirement.
I’m sure you don’t want to be paying for your student loans as you near retirement age. So it’s crucial to pay off your debt as soon as you can.
To save the most money and pay off debt quickly, the “debt avalanche” method is an effective strategy. While many experts believe in the power of using the debt snowball method, which focuses on paying the smallest balance first to gain small wins and motivation, the avalanche works best for saving money on interest and paying down debt quickly.
In order to create a plan to get out of debt:
- List all of your debt and interest rates
- Prioritize the list from highest to lowest rate
- Look for ways to save money on the three biggest expenses
- Side hustle to earn more money
- Calculate your desired debt-free date
Paying off debt has a positive impact on your overall net worth and helps you save money on interest. Once you’re done paying off debt, you can start investing the same amount of money you put toward debt and fund your retirement instead.
This doesn’t mean that you should wait to save for retirement until you are debt-free, it just means you should make this your number one priority.
2. Say Yes to Workplace Retirement Plans
Many employers offer a 401k or 403b retirement plan as a benefit to employees. Some employers may even offer a company match, meaning they will match your contributions up to a certain percentage.
An employer match is essentially free money and incentive for you to stay, so enjoy it while you can. It’s one of the perks of the job and if you choose not to contribute, you are effectively lowering your salary.
If your employer doesn’t offer a match, consider contributing fifteen percent of your income to your retirement account. That may seem like a lot, but you’re saving for your future! In 2015, employees can contribute a maximum of $18,000 per year.
“If you truly want to save for retirement, aim to save 15 percent or more of your salary. As a millennial, you can keep your expenses low and avoid lifestyle creep by putting more away towards retirement,” explained LaTisha Styles, millennial money expert at YoungFinances.
If 15 percent isn’t doable, contribute what you can — every bit counts.
Through investing in these retirement vehicles — which are tax-deferred — you can also save money on your taxes now. Your 401k contributions lower your taxable income, meaning you’ll pay less income tax.
The catch? You will end up paying taxes on these contributions when you withdraw the funds in retirement. However, most retirees end up being in a lower tax bracket during retirement than at the height of their careers, so you will probably be taxed at a lower rate.
As a millennial, it’s likely you’ll have several jobs throughout your career. Millennials are known as job-hoppers — which isn’t necessarily a bad thing — but you don’t want to leave your 401(k) money behind. As you change employers, be sure to rollover your 401(k) to your current employer or into an IRA.
In order to rollover your 401(k), talk to your current 401(k) administrator (if you don’t know, talk to HR) and fill out the required paperwork from your old plan to facilitate the rollover.
3. Open an IRA
While contributing to your employer’s 401k is a great start, it’s a good idea to diversify your investments and open up an IRA as well. An IRA is an Individual Retirement Account — which is not related to your employer. There are two types of IRAs, Traditional and Roth. Each plan has their own unique tax advantages.
A Traditional IRA is a good option for people at all income levels. It allows you to make tax-deferred contributions just like a 401k. While you can save money on your taxes now with a Traditional IRA, you will have to pay taxes on that income when you withdraw your funds at retirement age.
A Roth IRA is similar retirement vehicle, with some restrictions. Single filers must have a modified adjusted gross income (MAGI) of less than $131,000. Your modified adjusted gross income is your adjusted gross income (which can typically be found on your tax return) with the addition of several deductions, such as student loan interest, tuition fees, and more.
Through a Roth IRA, you can contribute after-tax dollars and your contributions will grow tax-free. Bonus: you can make tax-free and penalty-free withdrawals after age 59 ½.
Both Traditional and Roth IRAs have annual contribution limits of $5,500 for those under the age of 50. However, the limit may change each year, depending on IRS rules.
Which one should you use? it depends if you want to reap tax benefits now or later, though a Roth IRA can be a good choice if you are within the income limits — what’s not to love about tax-free withdrawals?
4. Robo-Advisors Take the Pain Out of Investing
Investing for your future might seem scary, difficult, boring, or all of the above. Luckily, there’s a new wave of robo-advisors that are making it easier for millennials to invest their money and build wealth for the future.
Typically, the millennial generation has been excluded from the traditional financial services market. Many financial advisors require high balances (sometimes $250,000 or more) and typically charge one percent of assets.
Robo-advisors are automated investment services that help you maximize returns and minimize losses. They’re quickly filling a unique niche, making investing more accessible to younger generations with fewer financial resources.
Some robo-advisors, such as Betterment, have no minimum deposit or balance requirements. Others, such as Wealthfront, do not charge an account management fee for accounts under $10,000.
To get started with a robo-advisor, you’ll typically take a short survey about your risk tolerance and financial goals.
Your risk tolerance takes into account your current financial situation, goals, as well as your comfort with risk. Some investors are more conservative, while others may be more aggressive.
Robo-advisors can also help you save money on fees.
Traditional financial advisors typically charge one percent of your assets, where as a robo-advisor can charge anywhere from 0.15 to 0.35 percent, depending on your account balance.
Based on Betterment’s calculator, if you had an account balance of $100,000, you’d pay $83 per month to a financial advisor, but with Betterment you’d only pay $13 per month.
5. Compound Interest Is Your Friend
When you’re in student loan debt, retirement can seem like the very last thing on your priority list. But the perfect time to start saving for retirement is when you’re young. Two words: compound interest.
Essentially, compound interest is interest that earns interest. Got that?
Here’s Investopedia’s definition:
“Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.”
Can you say money on top of money? Here’s an example for you:
Let’s say you invest $5,000 at age 25 at an 8% annual return, compounded monthly. Forty years later at age 65, you’ll have $121,366.93 — without adding one cent more than the original $5,000.
If you wait until you are 30 to make that $5,000 deposit, you’ll only have $81,462.75 by retirement age. That’s a huge difference. Compound interest and time are your friends. Use them wisely.
6. Fees Are Not
When you are saving for retirement, it’s crucial to understand how much you are paying in fees over time. You will likely be saving for several decades, so what seems like a small fee today can compound over decades and result in a huge chunk taken out of your nest egg.
To understand exactly how much you are paying in fees — and find low-fee alternatives — you can use services like FeeX.
How Much to Save For Retirement?
Now, the inevitable question: how much do you actually need to save for retirement? Unfortunately, there’s no cookie-cutter answer. How much you need to save depends on your goals, lifestyle, cost of living, etc.
Fidelity Investments suggests you save 8 times your ending salary for retirement. So if retire from a salary of $75,000, you’ll want to save at least $600,000. That seems like a huge chunk of change, but remember the power of compound interest and employer matches!
By paying off debt and contributing to your retirement now, you can set yourself up for a nice retirement. Start now — your future will thank you.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
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|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|