How can Millennials save for a comfortable retirement? Well, they will have to face challenges that their parents and grandparents have not had to face. In this post, we will examine three different ways in which younger workers can prepare for their retirement so many years in the future. With all of the bills, people have to pay it is essential that younger workers also make arrangements to plan for their far-off retirement because chances are no one else is. And the longer you wait to start the further behind you will be in the effort.
By saving early for your retirement allows for powerful compound interest to work on your behalf. If you want to retire with the funds, you will need to live, in your 20’s you need to save at least 10% of your salary. That goes up to 15% to 20% for people in their 30’s and all the way up to 30% for those in their 40’s. So, the key is to start saving as early and often as you can to maximize the power of compounding.
In the past workers could count on pensions from their employers to pay for their retirement along with the assistance of Social Security. A pension is also known as a defined benefit plan which is when a company will pay you in retirement a set amount that when combined with Social Security was enough for retirees to survive. But the age of pensions are practically over, and it is up to workers to plan and save for their own retirement needs. In other words, younger workers need to take an active role in their retirement preparations.
For Millennials there are three key saving tools that will assist you in preparing for your retirement. First, there are the workplace 401(k) or 403(b) plans that have basically replaced the old pension system. Three of the benefits of these plans is they allow you to save and invest a portion of your wages in a tax-free manner, meaning your current taxes will have your income reduced by the amount you contribute to the plan. Often, your company will offer a match of a portion of the amount you decide to save up to a certain limit. This is free money that no one wants to turn down. And in the current year of 2018, you are allowed to set aside up to $18,500 from your pay into these plans. This means you are able to save some serious money through your place of employment.
Next are Individual Retirement Accounts or IRA’s. Here I recommend you set aside the money in a Roth IRA meaning you will pay taxes on those funds now, but all proceeds will be provided to you in retirement tax-free. One reason Roth IRA’s are so essential when you are younger is that your tax bracket will be lower as you are earning less but I recommend Roth accounts no matter what your age is as you need a variety of income streams in retirement. But there are some restrictions on Roth IRA’s that you need to be made aware of before you open one. Roth IRA’s have income guidelines meaning if you are single you must earn less than $133,000, and for married couples, it is $196,000. If you earn more than that, see a financial planner, and there are loopholes in the Roth IRA’s that can be exploited if you know how. The limit that you can contribute to any combination of IRA’s is $5,500 a year.
Finally, there are Health Savings Accounts for those who have High-Deductible Plans for their health insurance plans. These plans when you are of working age are designed to be used solely for healthcare costs, and they are a powerful tool for people who qualify for them. They are different from Flexible Spending Accounts as those are capped at lower levels and good for a single year. HSA’s, on the other hand, are much more useful offering a triple tax benefit. The money is tax-deductible when you contribute to the account, it grows tax-deferred, and any withdrawals that are used for qualified medical costs are tax-free as well. So, if you have an HDP with a deductible of at least $1,300 for a single person and $2,600 for a family you qualify for an HSA. The maximum that a single person can contribute is $3,400, and for a family, it is $6,750, and the funds carry over from year to year unlike an FSA that you may also have.
While these are not the only ways that someone can prepare for retirement, they are the three most prominent available. If you have the means, it is vital that you, at any age, use at least the 401(k) or 403(b) and an IRA. HSA are limited to those with a high deductible insurance plan which not everyone has.
If you have any questions or need any additional assistance, please feel free to contact me either on the site or in a private email.
