Retirement Planning for Millennials – Getting Started

millenialsWelcome to Retirement Planning for Millennials – the first in a series of articles aimed at helping millennials get on the investing lader.

Millennials have come under some scrutiny lately for their lack of financial awareness, with John Aziz of The Week, even going so far as to brand themfinancial neanderthals”.

That may be a bit harsh, but Aziz has a point. According to a recent Gallup poll just 27 percent of 18- to 29-year-olds report owning shares in individual companies or as part of a fund, and its getting worse, thats down from 33 percent in April 2008. As an observer, it’s easy to see why millennials are so wary of the Street.

Lets face it, the financial world imploded right at the time most millennials began entering the workplace. Would you have put your trust in a bank during the later part of 2007? A recent study from investment bank UBS shows that Millennials are about as financially conservative as those that lived through World War II. That group of Americans, who are currently 68 and older, either directly experienced, or felt the repercussions of, the Great Depression.

To see a list of high yielding CDs go here.

 

Nothing to invest

There is of course another reason why millennials are not investing, they haven’t got anything to invest. A recent survey conducted by Yconic/Abacus found that almost 20% of 30 – 33 year-olds still live at home with their parents and 17% reported getting help from Mom and Dad to pay their bills.

So is generation Y so financially inept that no amount of sensible financial planning can save them? I’d like to think we haven’t bred a generation of financial neanderthals, so lets assume millennials arent investing because they either don’t know where to begin, or feel like retirement is years away and not something they have to worry about right now.

 

Retirement is years off, I have to change the world first

As you leave college and enter the world of work, thinking about what happens forty years from now is not going to be uppermost in your mind. The world is full of opportunities and you intend to take full advantage of them while you can. But if you take one piece of advice from this series, it should be this. The early bird gets the worm. The earlier you start investing, the better off you’ll be.

Even if you can only afford to put a small amount away each month. You’ll be better off in retirement than someone who saves a large amount later on. Let’s look at an example: Say you’re 25 and you decide to put away $166 each month. That’s roughly $2,000 a year for the next 40 years. Think you can afford that? If you can you’ll have saved around $560,000 assuming earnings grow at 8 percent annually by the time you’re 65.

But what happens if you leave it until you’re 35? How much do you think you’ll end up with then? $400,000, $300,000! No, if you put away the same $2,000 a year, but for three decades instead of four, you’ll end up with around $245,000 – yes! less than half the money. So I’ll say it again, the earlier you start the better off you’ll be.

 

What if I have student loans to pay off

Now it’s all well and good me telling you to put some money aside each month, but what if you’ve got nothing left over. Not every college kid gets to work at Google or Goldman Sachs. If you’re struggling to pay off student loans or cover rent, putting money aside may seem difficult, if not impossible.

If this is your situation, it’s important to recognise the difference between an expense and a luxury. Your student loan is an expense that has to be paid, that Starbucks coffee you have each morning is a luxury, and its one that could have you drinking out of soup kitchen when you’re older.

Look at it this way, putting aside $166 each month is just $5.50 a day. That’s equivalent to one Caffe Latte if you live in Manhattan. Would you sacrifice one coffee each morning so that you could live your retirement in relative comfort. If you could ask yourself the same question when you’re 65, I guarantee the answer would be yes.

Brian T. Jones, a Certified Financial Planner and author of “Getting Started: The Financial Guide for a Younger Generation, Says. “These years of saving in your early 20s are your prime years. If you deny yourself the opportunity, it will just set you back with retirement planning in the long run.” Even if you don’t drink coffee there are still savings you can make. Do you really need to upgrade your iPhone each year. Another great way of saving money is by living with friends. If you club together to rent one apartment, you’ll save more than enough on bills each month to put a little aside for retirement. Do it now, you’ll thank me later.

 

Where should I put it?

OK, so you’ve decided to put something aside. What are you going to do with it. Squirreling it away under the mattress isn’t going to do you much good. When you’re young and only have a small amount of money to invest, its important that you make each dollar count. So you’ll want to invest it in a way that encourages your assets to grow as quickly as possible. Where to start? The first place to look is to check if you’re eligible to participate in your workplace 401(k).

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account. The main advantage to joining a workplace 401(k) is that many employers offer incentives to join their program and will often match your contributions in order to encourage your participation. Think about that, your $166 dollars a month is now $332 and you’ll end up with over $1 million by the time you retire. Assuming earnings grow at 8 percent annually.

 

What if my workplace does not offer a 401(k)?

What if you’re one of the 78 million individuals whose workplace doesn’t offer a 401(k), don’t worry you still have options. In February 2014, President Obama announced the introduction of a new kind of savings account. Called myRA, this new account enables workers without 401(k) access the same easy way to save.

myRA accounts are simple: Anyone in a household earning $191,000 a year or less is eligible to open a myRA, and you can start one with as little as $25 with additional ongoing contributions of $5 coming from payroll deductions. One key feature of myRAs is that they are not tied to a particular employer. So you can change jobs, without having to worry about making any changes to your account.

That’s a potential advantage over 401(k) plans, where employees have to take steps to rollover accounts from former employers and often fall into tax traps that lead to penalties and higher taxes.

 

Safety and Security at the price of growth

myRA accounts are not designed to replace 401(k) plans. They do not give investors multiple choices about how they want to invest their savings. Instead, myRAs emphasizes safety and security, with investments that the government will guarantee never to go down in value.

The interest rate on your myRA balance will be based on what federal employees receive as participants of their Thrift Savings Plan retirement account, which is invested in the Government Securities Investment Fund, also known as the G Fund. According to the Thrift Savings Plan website.

 

A start but not the end

myRA accounts should be considered a stepping stone into the investment world and are ideal for low income families or those taking their first steps in employment. But the limits placed on myRA accounts mean they won’t come close to covering your retirement needs.

Your myRA account can only hold a maximum of $15,000. That is unlikely to cover a single years expenses today, never mind forty years from now. Once you reach the limit of your myRA, you have to transfer the balance to an IRA. We will take a closer look at how IRAs and Roth IRAs work in the next article.

But for now, sit down and work out how much you can afford to put aside each month. Remember, the more you save now the greater financial stability you’ll have later. You should also make enquiries about joining your company 401(k) plan if they have one. With house prices continuing to rise and wage growth remaining low, many millennials will be forced into renting for much of their lives. This means you won’t have the luxury of a large amount of equity in your home to drawn on in later years. That makes it imperative that you have enough income to cover your expenses once your working life comes to an end. You may not want to think about it now, but if you don’t, you risk becoming a burden on your family in your twilight years.

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