What Millennials need to know about retirement planning – Money Pacers
What Millennials need to know about retirement planning

What Millennials need to know about retirement planning

If you’re a Millennial starting out in your career you have plenty of time to save and compound interest can be a powerful retirement planning tool for you in your quest for wealth building.

Like most Millennials, you’ve probably already started putting money aside for retirement.  Your counterparts are saving a bigger chunk of their paychecks, setting up retirement planning, and investing more than any other age group. One survey conducted by the Transamericacenter.org showed seventy-two percent of Millennial workers have started saving – and at the young age of 22 (median).

Still, Millennials have been presented with a unique set of challenges and opportunities, says Jason R. Staley, investment relationship manager at Schneider Downs Wealth Management Advisors in Pittsburgh. The “lack of wage growth and uncertain job markets, combined with significant amounts of student debt and the likelihood of social safety net programs like Social Security and Medicare is less generous to Millennials than Baby Boomers, create an uncertain economic future,” Staley says.  Our Millennials have to know how to maximize their returns on to say retirement investment. It can make a huge difference in how far their money will go.

So what can Millennials do to save more for retirement? Here are five tips.

Five steps in retirement planning that could make You rich.

1. Max out employer matches

In general, a 401(k) is a retirement account that your employer sets up for you. When you sign-up, you choose to put a percentage of each paycheck into the 401 (k) account. Your money is then placed into investments that you’ve selected based on your retirement goals and risk tolerance. When you retire from your job, the contribution you have in the account will be available to support your living expenses.

Your contributions are tax-deferred

Your 401(k) contributions are automatically taken out of your paycheck, before taxes are withheld and go directly into your retirement savings account. So if your salary is $50,000 a year and you contribute $3,000 to your 401(k), you will pay income tax on $47,000 next April instead of the entire $50,000 that you earned.

2. Consider a Roth account

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. … With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income.

If you expect your tax rate to be higher during retirement than your current rate than choosing a Roth IRA make sense.  These investment vehicles are ideal for youngsters, and lower-income workers who won’t miss the upfront tax deduction and who will benefit from decades of tax-free, compounded growth. Roth IRAs also appeal to people who desire to minimize their tax rate in retirement as well as older, wealthier taxpayers who want to leave assets to their children or heirs tax-free.

3. Choose volatile investments

“When it comes to investing, high risk and high returns usually go hand in hand,” says Ann Dowd, CFP®, vice president at Fidelity Investments.  “Dramatic moves in the market may cause you to question your strategy and worry about your money.” However, riskier, more volatile investments — like those that tend to bounce up and down in value — will generally earn greater profits over the long term than investments that slowly gain in value. But for Millennials if you can afford to take advantage of this rule by investing in more volatile assets (typically stocks), you won’t need that money for decades,  so it won’t matter if your portfolio tanks in value this year; it’ll likely rebound in the next.

“Market volatility is a reminder that you should be reviewing your investments regularly.  Make sure you consider an investment strategy with exposure to different areas of the markets—U.S., small and large caps, international stocks, investment-grade bonds—to help match the overall risk in your portfolio to your personality and goals,” says Dowd.

4. Plan for the future

When you’re young, there’s nothing wrong with having fun and buying a few things as long as you’re saving money. You don’t have to micromanage your money — but you will want to learn about asset allocation is all about and how to tweak your investment once a year.

If a mutual fund you own is tanking, then it will take up a large percentage of your portfolio. If that mutual fund sinks all together later, you don’t want it to drag your entire portfolio down with it, so do some occasional buying and selling to keep your investments up to par.  You also need to calculate the amount of money you’ll need when you retire. Check out some retirement calculators to help determine this amount. Try using two or more calculators to get the mean amount you’ll need, then, adjust your savings to reach your goals.

And don’t panic if  your numbers look huge now, remember compound interest will end up making up any losses.  Here’s a quick example to prove it. Say you invest $6,000 per year for 30 years and earn a respectable (but not exceptional) return of 6%. You’ll end up with $503,000, even though you only invested a total of $180,000.

If you’re earning a good living, saving, and investing aggressively, then you’ll be on track to save up hundreds of thousands (or even millions) throughout your career. Just contribute consistently to your retirement accounts and let the market take care of the rest.

5. Have some nonretirement savings, too

Don’t make retirement planning accounts the be-all and end-all of your savings plan. Between now and retirement, you’ll make face some rough times. Chances are you’ll experience family situations, medical bills, car maintenance issues, job loss, and any number of financial crises.

You’ll need money to get through emergencies. That’s where an emergency back account come in. You don’t want to have to raid your retirement money to pay for emergencies, this will set back your retirement plans significantly, believe I seen this and done this, you don’t want this to be your story.  Keep your retirement funds secure by setting up a bank savings account or other cash-equivalent accounts for the day that you really, really need some money.

Don Briscoe
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Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
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