Retirement & Income Planning: How to Save for Retirement If You’re a Millennial

If you’re concerned about having enough to live on when you retire, you’re right in step with other MillennialsSeventy-two percent of Millennials are already saving for retirement, and the average age they begin is 22.

Your generation is very aware of three facts about retirement.

  1. Social Security may not be bust when it comes to your turn to retire, but it may not be incredibly robust either. There are likely to be fewer working adults paying into it. That means funding may become increasingly difficult. It also means the age at which you can retire without penalty (read: less money than if you wait until the designated age) will gradually go up. It’s already risen from 65 to 66.
  2. The price of everything is likely to rise steadily. Food, housing, health insurance, cars…the cost of living goes up steadily. Social Security payments, even setting aside for a minute the health of the system, is very likely to cover less and less of your needs during retirement.
  3. Pension funds are far more scarce than they used to be. The days of employer-funded retirements are basically over. Today’s employees need to be proactive about retirement savings. You have to make and execute a retirement plan by yourself.

So what’s the best way to do this? Think both specifically about retirement and about other big ticket items that can affect your retirement savings.

Retirement Savings

1. Contribute to a 401k Savings Plan

A 401k savings plan is an employer-sponsored retirement plan. Not all employers provide them, but many do. They are very worth it if your employer has one. You choose a percentage of your pretax salary to contribute. Because it’s pretax, you are not taxed at all on the money until you take it out at retirement age. Sweet, right? Even better, the untaxed amount lowers your taxed salary and might, therefore, lower your tax bracket.

Some employers offer a match. Whatever percentage of your salary you contribute, they match it. (Some match 50%.) So essentially, this is picking up more money from your employer, which is always a good idea financially.

2. Contribute to an Individual Retirement Account

An individual retirement account (IRA) is also a retirement savings vehicle. Your company may offer these. Unlike 401ks, though, IRAs aren’t usually matched. If they don’t offer them, an individual can always open one. Contributions for standard IRAs are pretax and have the same pretax advantages as 401ks. A specific type of IRA, called a Roth IRA, takes taxed contributions. The advantage of this type is that your withdrawals, once you hit retirement age, are not taxed. In standard IRAs and 401ks, retirement age is when the taxes kick in.

You will need a brokerage account, either in person or online, to open an IRA. You can choose among stocks, bonds, (either individual or in mutual funds) and other investments for your IRA. It’s prudent to research financial advice before choosing.

Making Sure You Have Money to Save

Knowing retirement savings vehicle is one thing. But a key part, of course, is having enough to place in these accounts.

There are two items that can cost enough in your early adult years to effectively stop any flow into retirement savings. The first is student loan payments. The second is housing costs.

Student loan payments are heavier in your generation than in past generations. Do everything you can to reduce the amount you pay. Retirement savings can compound as you pay student loans, but they can’t compound if you don’t have any. Use the savings for your retirement accounts. The government has income-based repayment programs if your salary is low. Consolidation often lowers payments.

Housing costs in many metropolitan areas (San Francisco, New York) are also very high. If you can, consider living in areas where costs are lower. Consider roommates or living with family. The less you spend on housing every month, the more you’ll have to save.

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