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Millennials suck at saving for retirement

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When it comes to spending money, we quickly find ways to spend it. Whether it’s for a vacation, shopping for high-end brands, paying bills or putting it towards paying off our loans – you name it. But it takes time and effort to earn money. Unless you’ve figured out how to earn money while you sleep, chances are – you’ve had to put in the time to earn money. But they disappear in a blink of an eye. 

Saving for retirement seems to be of the last resort, knowing that retirement is decades away. In fact, most millennials don’t even consider placing retirement planning onto their priority lists. According to the National Institute on Retirement Security, 66% of the millennials have nothing saved for retirement. This is deeply troubling, as this implies that the majority of the millennials will have to work past the age of 60 (if not longer) to maintain the same standard of living they have now.

I agree it’s a bit more appealing to spend extra cash on a lavish vacation than to put it aside for a few decades. But if you’re not putting away some of your earnings away now, where will you get them when you retire? Is retirement still a couple of dozen years away and you think you’ll have enough time to save? Think again. The closer you get to retirement, the more money you’ll need to put away each year. A general rule of thumb to remember about saving for retirement is that you should begin to invest 10-15% of your annual salary towards retirement.

The math is quite simple.

If you start saving, let’s say, 10% of your $50,000 annual salary towards a retirement plan, your money will have more time grow than if you started investing the same amount at age 50. In addition, the interest that you earn each year (on top of your invested amount) will grow as well! This is called compound interest. So why not take advantage of free money when you still have time?

Why the Retirement Problem?

Right until about the turn of the millennium, companies offer pensions plans as a tool to attract great candidates. Pensions are a fixed amount that is paid out to employees who have worked for the company for a certain amount of time. This money, in addition to Social Security benefits, defined retirement for millions of individuals. So there was little planning and thinking involved, as it related to retirement. Today, employer pension plans are almost non-existent.

Now the burden of managing retirement fell completely on our [i.e. millennials’ and generations hereafters’] shoulders.

What Does Retirement Planning Look Like?

One of the retirement planning strategies, as proposed by Investopedia, is to break it down into three general stages:

1.    Young Adulthood (Ages 21-35)

You’ve entered this stage right after college, stuck with student debt and an entry-level job. While you may not have a high income and most of your money seem to dissolve into thin air, whatever money you put away has the greatest potential to grow as you have the benefit of time. Take advantage of the interest that compounds on top of everything you put away into your retirement! 

2.    Early Midlife (Ages 36-50)

You’ve grown professionally and are now earning a more comfortable income. But your mortgage, your kid’s college tuition are pulling your earnings down. During this stage, you should be contributing more towards your retirement (since 10% of your higher salary is an even greater amount than the income you were earning in your 20s). Again, you still have time until retirement so why not take advantage of free money that literally grows on its own? 

3.    Later Midlife (Ages 50-65)

You’ve paid off your loans and kids are most likely out of the house. You feel good about retiring, but it appears as though it’s right around the corner. You’ve grown professionally and have more disposable income now than before, and thus can contribute more towards retirement. Depending on interest rates at the time, you’ll be able to still earn on top of your investment.

Keep in mind, this is just a general retirement strategy and you can adapt it to your own lifestyle. But, I would recommend that you consider setting aside an emergency fund that would cover you for unforeseen situations such as medical expenses, long-term health care, and family needs. I’ve actually setup a separate savings account into which my employer deposits a portion of my paycheck automatically. This way, I don’t even have to think about it. See if you have this flexibility through your work, and also check whether your bank offers a similar service.

Must-Know Retirement Tips

1.    Elect into Employer-Sponsored and Tax-Advantaged Programs

Employer-Sponsored Plans are benefit plans that employers often offer employees to specify the amount of their salary that they would like to contribute towards their retirement. In fact, most employers automatically enroll their staff at a low percentage (typically around 3%). What makes this program profitable to you is the fact that employers often match your elected contribution (up to a point).

Because these plans deduct your contribution automatically, the amount that is deposited towards the retirement plan does not count towards your annual taxes – a bit of tax—relief, if you will.

There are two types of employer-sponsored programs- 401(K) and Roth 401(K). In these types of programs, employees directly receive money from the employers matching the contribution into employee’s retirement saving. The key difference between these plans is whether tax was deducted at the time that the money was deposited (Roth 401K) or whether it’s paid out at retirement (standard 401K plans). Technically, employers are willing to put down money towards your retirement – if you are – and it will be silly not to take advantage of the free money that’s being left on the table.

Moreover, there are companies who still offer traditional pension plans. Especially if you’re ok to invest the time needed to earn this benefit through your employer, this would be a great “add-on” to your retirement income. Coca-Cola, Johnson & Johnson, and many more companies provide their employees with pension plans. Other companies such as JP Morgan Chase and Merck provide a combination of the traditional pension plans and employer-sponsored programs.

So, figure out what is the retirement saving policy at your organization and start utilizing it soon. Use those benefits to your maximum advantage.

2. Analyze your debt and expenses

Develop a long-term saving strategy. In addition to the money that you set aside through employer-sponsored retirement programs, consider investing or saving additional income that will be fluid (i.e. available) to you at all times. This offers you the flexibility to use this money for emergencies and other unexpected costs. In comparison, IRA accounts are great long-term expenses, but most do not allow you to continuously contribute to that account and you cannot withdraw funds (without a penalty) until you’re about 59.5 years old.

Now, that may be a little longer to tie your money up somewhere if you need to be able to access it for emergencies. Create a budget and see how much you can feel comfortable to contribute each month.

3. Increase your sources of income

Thinking about retirement and maintaining a certain lifestyle under one salary may be a little bit overwhelming. Diversify your income with other sources. 

For starters, consider investing in stocks, bonds, and shares with steady returns are a few good options. Invest in real estate for a long term return. Starting your own business, or selling your skills through consulting can also help you make more money.

4. Control your spending and start saving

As a first step, you need to be determined and firm about your spending. Enjoying a delicious dinner at an expensive cafe might look affordable for now, but it can make a dent in your financial plan. Cut down on things needless expenses and make every dollar count.

When you receive your paychecks, make sure you pay yourself first (i.e. into your retirement savings) and then pay everyone else. Be consistent, develop a minimum that you’re comfortable setting aside and stick with that! As I mentioned earlier, I do this automatically through my employer, so that the money that is available in my checking account is after I’ve already contributed to my retirement savings. Use the remaining income for paying your bills and the residual money for your own day to day needs. This is a proven way to multiply and save your money.

Conclusion

As life expectancy rate has increased, it means that a longer lifespan would be spent after retirement. This implies that the need for healthcare plans would also increase.   Forget a beachfront retirement home and worldwide travel, if you don’t have enough saved up for retirement now, public funding will only help keep you afloat after all the potential expenses that complement old-age.

Keeping the above reasons in mind, you should start saving as soon as you can. Plan your systematic investment and retirement savings. Work with a financial advisor or a consultancy which will help you make an effective savings plan. If you are falling short on where you want to be in your retirement, it’s high time you should start saving. Reaching the stage of retirement comfortably without money issues is a feasible and achievable goal with proper planning and implementation.

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