What is the best retirement strategy for millennials?
Planning your retirement early is always the best way to amass enough resources so that you have flexibility and options later in life. Here are tips for creating the right plan, that works for millennials.
Like every generation, millennials will redefine retirement, particularly when they retire and how they spend their time. They will also have to fund these future years while balancing other goals that require financial resources, like starting a family, pursuing graduate education or buying a home.
Accumulating wealth and investing those funds early in your career can give you peace of mind.
“One of the biggest things millennials have going for them is time,” said Michael Zovistoski, Partner at UHY LLP and Managing Director at UHY Advisors NY, Inc. “Time is so important when it comes to saving for retirement - the compounding of money, the growth and ability to withstand and work through any dips in the market - there’s been study after study that the amount of time in the market is more important than timing the market.”
While it may seem that you’ll never be able to stop working, how you structure your career coupled with the money you’re able to set aside (even if it’s a few dollars a week) makes a difference.
Set Specific Career Goals
“Retirement used to be you work until you can’t work anymore, and that has changed to be to working decades not in your primary career,” said Scott Thoma, CFA, CFP®, Principal at Edward Jones.
People do a phased retirement from sitting on boards and working with independence and flexibility to do what they want.
You may not know exactly how you want to spend your time during retirement, but as you work towards your professional goals, you might want to think about what kind of work you can pursue in later years.
“Today, people do a phased retirement from sitting on boards and working with independence and flexibility to do what they want, but maybe they’re still earning an income and supplement what might be coming from government programs, like Social Security, and portfolios,” said Scott.
Take Tolerable Career Risks
Working at a start-up may seem like a great way to amass a lump sum fast; a lower salary is often offset with stock options that are exercisable if the company goes public or is sold.
This career move is not without risk, however, because the stock options may end up worthless. Although there are options in between, the less risky career choice would be to take a position with a lower salary that has a pension benefit.
“Some might think cash in the door is better than cash that may not materialize in five years’ time,” said Michael Gore CA, Director, External Reporting and Accounting Policy, Ontario Power Generation, Toronto.
If I have a long-time horizon, we’ll recommend someone take risks with their investments, but they shouldn’t take so much risk that they derail their strategy.
Millennials (and Generation Z) can be better equipped to take these risks because they have time on their side to make up for lost savings if that pay-out never occurs.
Regardless, it’s important to take a position that offers a salary structure that you’re comfortable with and will help you to plan for your future.
“If I have a long-time horizon, we’ll recommend someone take risks with their investments, but they shouldn’t take so much risk that they derail their strategy,” said Scott.
“With their career, they have to have the personality where they thrive on that type of environment and are comfortable with that uncertainty. Certainly, the income has to be commensurate with the risk.”
Tax Savings Through Saving
Millennials have more choices of where to save than Baby Boomers, said Leonard Wright, CPA. “Millennials need to be concerned with tax diversification in addition to asset diversification.”
IRAs and 401(k)s are savings plans in the US that allow people to grow investments tax deferred or tax-free. There are penalties for early withdrawals on these accounts, but they provide for a mechanism to save for retirement with favourable tax treatment.
Also, companies offer matches to 401(k) contributions, which is essentially a 100% return on your money and part of your compensation.
If we had 20 to 30 years and saved $5 each week religiously, the accumulation seen without a rate of return is staggering... Starting early is the holy grail.
While borrowing against an IRA is not allowed, you can borrow against 401(k)s if you need the capital before retirement. Income tax is due on all withdrawals, with withdrawals prior to age 59.5 also subject to a 10% penalty.
Both IRAs and 401(k)s are a mechanism to save after-tax income that also grows tax-free, provided the holder withdraws after 59.5 years old. Withdrawals prior to this age are also subject to a 10% penalty.
“It’s extremely important that people start as early as possible for the simple ability to grow investments funds on a compounding basis – compounding is extremely valuable,” said Tim Speiss, partner-in-charge of EisnerAmper's Personal Wealth Advisors Group and vice president of EisnerAmper Wealth Planning LLC.
“If we had 20 to 30 years and saved $5 each week religiously, that compounding power and the accumulation seen without a rate of return is staggering when you’re 60. Starting early is the holy grail.”
The Rule of 72 Doubles Your Money
The Rule of 72 calculates the time period that your money will double – divide the rate of return by 72, and that’s how many years it will take.
“Every 10 years you wait, that’s a double you lost,” said Scott. “The most valuable double you get is your last one – the challenge is whenever you’re dealing with a very long-time horizon, not understanding that the biggest asset you have right now is time."
Live on a Budget and Minimize Debt
Mortgages, car loans and student loans might be a higher priority than saving for retirement or saving in general, but this financial goal needs to be on par with the others.
“Pay yourself first and maximize the employer contributions to 401(k)s,” said Michael Zovistoski.
“Pay down debt with the highest interest rate first and continue down the line until you’re out of debt. Live within your means and a budget – don’t try to keep up with your neighbours and live with what you can spend.”
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.