If you are a Gen X or Millennial, you are not immune from needing to think about your retirement savings and financial planning. In fact, for Gen X, it is a little late but later is better than never. For Millennials, now is the opportune time to think about your retirement and how you want to fund it. The reason is time is on your side, and mistakes now can cost you hundreds of thousands of dollars later down the line. The following are seven tips that Gen X and Millennials can take to ensure their retirement success. If you need assistance with any of these seven topics, contact a Registered Financial Consultant.
Save Often and Early
As I allude to a minute ago, time is on your side when you are younger and saving for retirement. The differences can be astonishing between someone who saved a few thousands of dollars a year under the age of 20 and then again after starting their careers when they get out of college. Even if you saved a few thousand during college why you worked, it could mean a difference of six figures in your ending balance.
Most of you have heard that if you saved $5,000 a year for five years from 20-25 and then waited to save $5,000 a year every year from 26 to retirement, the one who saved for five years comes out ahead in the end. I know it sounds crazy, but in fact, it is true. So, imagine what your retirement nest egg would look like if you started saving in an IRA with the money you earned in high school at age 16 or 17. And then continued to contribute a few thousand a year every year until you reached age 60 or even 67, it would be a massive figure.
The S&P 500 has averaged about a 10% annual return since 1926. That does not mean you will earn 10% every year as some years the market will go down for a variety of reasons. This year we saw massive declines due to the COVID pandemic. Yes, these events are rare, but they do occur, yet the markets have still averaged 10% a year. And if you were to use the Rule of 72, that means your money would double every 7.2 years if you save from age 16 to 65, that is almost 50 years of your money compounding for your benefit. That means just in that period, and your money could have the opportunity to double almost seven times.
Invest in Stocks
I just sad that the S&P provided about a 10% annual return, so why in the world would you not invest your retirement savings in the stock market? Yes, it is essential to make wise investment decisions, but investing in equities is one that just makes sense when you are younger. And I mean invest yourself 100% in equities at a young age. The best way to do this and do it safely is to invest in a low cost indexed mutual fund or exchange-traded fund to ensure a single bad company or sector does not hamper you. More on these issues a bit later.
But investing in stocks is for your long-term needs and not short-term. Money that you will not need for at least five years can be invested in stocks, but anything that might be needed in less than five years needs to be put somewhere else. Somewhere less volatile and stable as you need to preserve capital at this point and are not as concerned about growth or return. Short-term savings and your emergency fund need to be in cash or an equally safe vehicle such as a money market account or even short-term Treasuries.
Tax-Advantaged Accounts
The key for your money to take advantage of compounding it is best done in a tax-advantaged account. This means using an IRA or a 401(k) at your place of work. Ideally, you will have both and use both. The reason these are so effective is the traditional kind is placed into the account before being taxed and thereby reduce your taxable income. Then the funds grow without being taxed for several decades, and when you finally reach retirement age, you withdrawal the funds, and they are taxed as ordinary income.
When you are younger, I do and can recommend a ROTH account for most Millennials. The reason here is you are earning less, and by placing the funds in the retirement account after being taxed, they too will grow in a tax-free environment. Then when a ROTH account has funds withdrawn, the proceeds are tax-free as you already paid the taxes on them. The reason I recommend a ROTH account early in your working career is you are in a lower tax bracket and will benefit more later from the tax-free money then as you earn more switch to a Traditional account.
Go Automatic
If you save in a 401(k), the funds are taken from your paycheck before you even see the money. That means you will not miss the funds as they were never in your checking account. You can also set up direct deposits for IRAs and other saving vehicles. The more you can automate your savings, the better you will be in the long run. And when you get an annual raise, automatically increase your contributions to your IRA or 401(k) until you achieve the maximum you are allowed to contribute.
Costs are Important
The key is to keep your costs as low as you can so that as much of your money works for you are long as it can. A 0.5% fee for a mutual fund or ETF compared to a 0.1% fee can mean tens of thousands of dollars over a few decades. So, when you are buying a fund, really keep the fees in mind. Also, when you are buying funds or equities keep commissions in mind as well. Many online brokerage firms now offer no-fee transactions on trades or for account maintenance. Three that I use and can recommend are www.vanguard.com, www.schwab.com, and www.firstrade.com. All are good and have their advantages and disadvantages, so do your homework before you open an account.
Diversify
In with keeping costs low by going the route of an index fund or some other type of mutual fund or ETF, you can keep your investments more on the diversified side. Try to avoid concentration in a single company or sector. And for that matter, avoid being concentrated in a single country by looking outside the US for investment choices. Funds have all sorts of options and cover all parts of the world, so look and see what is available.
Get a Financial Plan
As a Millennial, you may be younger and may not have many assets, but that does not mean you will not benefit from a well laid out a financial plan. These plans may be more critical for you than they are for your parents. The reason is Social Security may not be around in the same manner, and it is now. Pensions are disappearing at a rapid rate. This means that you will be held more responsible for funding your retirement. Do not wait until you are older to do this and get a jump on the matter now while you still will have decades to let your money work for you.
These seven areas are essential to Millennials and even can be vital for unprepared Gen Xers. If you need assistance, seek out a fee-only Registered Financial Consultant. For individual assistance, feel free to reach out to me at kirk@kgmeyerpc.com. I welcome any comments or questions via email, or you can leave a message on the website. To join our email newsletter, please fill out the form below.
