Millennials won’t have their grandparents’ retirement
By Megan Nichols
Attention fellow millennials: You and I are facing a retirement that is likely going to be longer than our parents’ and grandparents’ and will involve more uncertainties. In general, we will have to pay more for our retirement out of personal savings than previous generations. Not to mention the fact that life expectancies continue to increase and job stability has been declining.
In the not-so-distant past, it was the norm to work for one company for 30 years, then retire with a pension and retiree health benefits. These benefits, coupled with Social Security, made retirement planning fairly straightforward. With some uncertainty around what Social Security will look like for us in 30 years and pensions and retiree health benefits going by the wayside, the fact is that retirement funding will require more preparation on our part and will be more complex than for earlier generations.
Retirement planning can feel daunting, but following some basic rules will greatly improve your chances of success.
Starting early really makes a difference. The earlier you start saving, the less you actually need to save overall to reach your objective. This is thanks to the power of compounding.
Be a consistent saver, even if it means starting small. Small investments become larger investments over time.
Example No. 1: Mary starts early, saves $1,200 per year for 10 years ($12,000 total) and earns 8 percent per year. She stops contributing and keeps the money invested for another 20 years. At the end of 30 years, she has $81,026. Jeff, on the other hand, starts late. He does not save for the first 10 years, then contributes $1,200 for 20 years ($24,000 total) and earns 8 percent per year. His balance in 30 years is $54,914. In other words, he saved $12,000 more than Mary did, but because he waited, he ended up with $26,111 less.
Take advantage of company sponsored retirement plans, such as a 401(k) plan. You should always contribute at least enough to get the full match if the company offers one—otherwise you are leaving money on the table!
Example No. 2: Sue’s employer offers a 401(k) and matches up to 4 percent of her salary. If she makes $50,000 for the year, that is $2,000 in free money. Assuming 2 percent annual wage increases, over 30 years with an 8 percent annual return that amounts to $275,043 in additional savings.
If the company you work for does not have a retirement plan, save in an IRA or Roth IRA. Saving in a Roth while you are young and in a lower tax bracket is advantageous.
Do not withdraw retirement savings—ever! If you leave a job (as many millennials will do before retirement), roll your old retirement plan into an IRA. Do not think, “it’s only a few thousand dollars, it won’t make a difference anyway.” That is wrong.
Example No. 3: Gary has $5,000 in an old 401(k) plan. If he leaves it invested for 30 years and earns 8 percent per year, the account will grow to $50,313. If Gary rolls the account into an IRA and simply adds an additional $1,000 per year (about $83 per month) during that time, he will have $163,597 after 30 years.
Increase your contributions over time. As your income grows, so too should the amount you are saving.
Example No. 4: If Gary (Example No. 3) started with an additional $1,000 per year but increased his contributions by 10 percent each year (so, $1,100 in year two, $1,210 in year three, and so on) he will have $419,651 at the end of 30 years.
Invest heavily in equities (stocks) while you are young and let it ride. Because time is on our side, we can withstand market volatility. Do not panic if your investments drop—this is just part of investing. Over time, investing in equities will give you the highest return potential. Remember that you are combating inflation—which has averaged around 3 percent since the early 1900s.
Visit a financial planner. Many planners will consult with you, at no cost, to help point you in the right direction. Finding and maintaining a relationship with an advisor can help keep you on the right path and alleviate stress and uncertainty. My advice is to find a fiduciary advisor, not a product salesperson (fee-only being the gold standard). Letsmakeaplan.org is a great resource.
Retirement is the largest expense that you and I will face in our lifetimes. While it is true that the burden lies heavier on us than on generations before, there is hope. We have time on our side. Starting small, staying disciplined and receiving sound and consistent guidance along the way is the recipe for success.
Megan Nichols is certified financial planner with HFG Trust in Kennewick.
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