May 7, 2014 – By Amy Fontinelle
Statistics show the odds are stacked against the Millennial generation: They will retire later than their parents – or not at all. But time offers hope. Gen Yers have decades to correct the effects of a bad economy, slow job market and delayed financial planning. Taking action now and avoiding critical mistakes may spell the difference between retiring on time or over a decade late.
Follow a Monthly Budget
The first step in a workable savings plan is knowing how much money you have to save. The best way to determine that amount, and to look for ways to increase it, is through budgeting.
“Creating and adhering to a monthly budget is incredibly beneficial,” says Joe Belsterling, a Millennial and online education entrepreneur in Williamsburg, Va. “Although while in college or just after college it may seem like an unnecessary inconvenience, creating such habits and following through with them better allows Millennials to live frugally and start saving disposable income.”
Saving 15% of your income for retirement is ideal, but if you’re early in your career and paying off debt, simply save what you can.
Try putting 50% of income toward fixed costs like rent, student loans and groceries; 30% toward fun things like movies, clothing and trips; and 20% toward an emergency fund, retirement, a home and your wedding, says Jordan Kunz, a Chartered Financial Analyst and Certified Financial Planner with Boulder, Colo. investment-management firm Sargent Bickham Lagudis. He also recommends Mint, the free online budgeting tool.
Save and Invest Early and Often
The sooner you start saving and investing, the more time you have to benefit from bull markets and compounding returns.
Saving consistently and starting early is key, says Elle Kaplan, the CEO and founding partner of New York-based Lexion Capital Management, one of the only 100% woman-owned asset management firms in the United States. “For any young generation, it’s important to understand that every little bit you save can make a big impact if you start early enough, and you don’t need to wait until you ‘have money’ to save.”
Kaplan recommends a well-diversified portfolio of stocks, bonds and commodities from a wide range of markets and geographies.
Don’t Count on Pensions or Social Security
According to some estimates, the Social Security Trust Fund could run out of money by the mid 2030s, so Millennials should expect reduced benefits. Relying on Social Security isn’t a good idea, anyway – not only does someone else control that money, but even today’s payouts are the equivalent of a minimum wage job.
“They need to understand that the stock market may still be a good way to invest for the long term,” says Wendy Weaver, CFP, a portfolio manager who specializes in working with young investors at FBB Capital Partners in Bethesda, Md. “Many young investors have developed a distrust of the financial markets after watching their parents’ investments temporarily lose value. But investors in their 20s and 30s have a much longer time horizon and can afford to take a little more risk than many are currently willing to take,” she says. “If they’ve been holding cash in a bank savings account for the past five years, not only have they not participated in the U.S. stock market’s recovery to new highs, but they’ve actually lost money because of the effects of inflation.”
Pensions are now typically only available to government employees, and many states face severe pension-funding shortfalls that make future payouts uncertain. Further, pensions are increasingly defined contribution rather than defined benefit. This makes them more like 401(k)s; the employee must invest contributions well in order to receive a high future payout, unlike a guaranteed future payout provided by a defined benefit pension plan.
The upside of the decline of pensions? Without them, Millennials enjoy greater job flexibility and satisfaction with the freedom to move from job to job.
“Because companies don’t have pensions anymore, Millennials don’t have the incentive to stay in one place and are more likely to find a career that they have a passion for,” says Millennial Neil Maxwell, a Certified Financial Planner with Button Financial, a registered investment advisor in Lakewood, Colo. “We move around more in the early years in the workforce, but I have confidence that we are doing it in order to find our place in the world where we can add the most value.”
Take Your 401(k) with You
Amid all that pensionless job-hopping, Millennials should keep track of the retirement assets their employers do offer: 401(k) savings plans.
A study by Fidelity Investments found that 41% of Millennials are not rolling over their 401(k)s, but cashing them out when they leave a job – a financially detrimental choice that could mean losing as much as half of the account balance to taxes and penalties, depending on your tax bracket. These Millennials also miss out on the opportunity to earn compound returns.
“Millennials need to roll over their 401(k) accounts from job to job and not take the money out in between jobs, even if the amount appears very small,” says Jamie Hopkins, assistant professor of taxation in the Retirement Income Program at The American College in Bryn Mawr, Pa., and associate director of the New York Life Center for Retirement Income.
Rolling your former 401(k) into the plan offered by your new employer or into an IRA will maximize your retirement savings.
In addition, you should avoid ever taking a loan from your retirement account. Instead, increase the percentage you contribute to your retirement account every time you get a raise, says Katie Ross, community education and marketing manager for the national financial education nonprofit American Consumer Credit Counseling. If you already get by on your current income (without the raise), you won’t miss the additional deferral to your retirement savings, but you’ll definitely appreciate the boost in your retirement income.
Attack Those Student Loans
“The Millennial generation overall is really struggling under the weight of unprecedented student loan debt, and it’s important that they pay down this, as well as their consumer debt, down as soon as possible so it isn’t accruing interest,” Weaver says.
Assuming the median student loan debt at graduation of $23,300 (as calculated by NerdWallet), a 4.2% interest rate and a standard repayment plan of 10 years, you will pay a total of $5,273 in interest. Adding $100 to your monthly payment would cut your payoff period to 6.7 years and save you $1,864 in interest.
Paying off your student loan debt early has additional benefits. It will be easier to qualify for a mortgage, for example, and you might be able to get into your dream home right away rather than settling for a starter home.
Further, if your student loans are paid off, you can’t default on them, which means you won’t fret over having your wages garnished or the government keeping the tax refund you were expecting.
Make sure to take advantage of any employer assistance or loan forgiveness programs you might qualify for through work, but balance those benefits against the prospects of higher paying or more rewarding jobs elsewhere. In other words, don’t teach for five years to get $17,500 in student loan forgiveness if you’d be happier in another position, especially if that other job’s salary would make it far easier to repay your loans than the subsidy would.
Finally, when you file your federal tax return, don’t forget to claim the student loan interest tax deduction.
The Bottom Line
Millennials are at a key point in their lives to start making the right financial choices to avoid delaying retirement until the predicted age of 73. While a traditionally funded retirement may be out of reach for today’s 20- and 30-somethings, a proactive approach to saving and investing can drastically alter an otherwise bleak financial future. With plenty of time left to form those critical spending and saving habits, the success of Millennials’ retirement rests more in their hands than for any generation before them.