Retirement. As a millennial, retirement seems far away and not at all a priority. Thinking of aging is not at the top of our minds; therefore, saving for retirement isn’t at the top of our priority list.
According to the 2014 Wells Fargo Millennial Study, only 55 percent of all millennials are saving for retirement.
The main reasons for the lack of investment include not having enough money to save (84 percent), other more immediate priorities (81 percent), and the need to pay off debts first (77 percent).
It is easy to say, “I will save for retirement after I pay off this debt or once I buy a house,” but the longer you put off saving for retirement, the less time you have and the more likely you are to forget to make the investment. When we graduate college, we have to pay off student loan debt, then we save for a wedding, then a house, then we prepare for a baby. Retirement tends to quickly fall off our list… but it must remain on the list.
Kiplinger.com recommends having 80 percent of your yearly pre-retirement income saved for retirement. This a ballpark estimate, it can fluctuate, particularly based on healthcare needs. Very simply, the earlier we begin to save for retirement, the more money we will have when the time for retirement comes. Additionally, it gives us flexibility on the age of retirement.
An article from Investopedia lays out five retirement warning signs for millennials:
Financial Literacy Gap: This is a big problem for millennials, but isn’t unique to our generation. The difference is the implications of our financial decisions. We are no longer in the time of employee pensions, and Social Security is uncertain for our generation. We have to be fully knowledgeable about our options, but right now, we aren’t.
Delayed Savings: Only 61% precent of millennials label themselves as “savers.” As previously mentioned, this is an issue because saving early is one of the best ways to ensure a stress free, financially comfortable retirement.
Drowning in Debt: Millennials are in a ton of debt (according to NerdWallet, the median debt for a student graduation is $23,300). These large amount of loans delay large purchases and savings.
Income Inequality: Society is still recovering from the great recession, and jobs are scarce. Our generation is trying to find long-term employment and create financial security in a time where jobs aren’t always easy to come by.
Insufficient Social Security and Pensions: More than a third of millennials expect to receive 0 percent of their retirement income from Social Security, and another 21 percent say they have no idea what to expect, according to the previously mentioned Wells Fargo study. The uncertainty of social security that so many of us have, makes it crucial to know our options and begin investing in retirement now.
There are many types of retirement accounts, but there are a few that are easily accessible to millennials.
Traditional Individual Retirement Account (IRA)
The traditional IRA is a simple account to open and maintain. Contributions to a traditional IRA are tax deductible and the earnings grow on a tax-deferred basis, so taxes are not paid until the money is withdrawn. Contributions have a limit each year and there are fees associated with withdrawing money from the account before retirement.
Although rates will vary based on numerous factors, an average yield for a traditional IRA is 10%, so the earlier you invest, the more money you will have when it is time to retire. An IRA can be opened at most banks, and is a great compliment to another retirement account, but can also be your only retirement account.
For more information on the differences between Roth versus Traditional, IRA’s here is a comprehensive guide on what you need to know.
This account is the most common and what most people think of when they think about retirement accounts. A 401K allows employers to invest in a retirement account on a pretax basis. Employers can choose to match contributions from employees or make contributions as a percent of income. Millennials should talk with their employers about a 401K account and contribute accordingly.
The myRA account was created for people who want to save for retirement, but (1) don’t have access to a retirement plan at work and (2) earn less than $129,000/year. The myRA is through the federal government. According to the According to the myRA website, this type of account is “simple, safe and affordable.” This account has no fees, is backed by the US Treasury and has the same interest rate as investments in the government securities fund available to federal employees.
CNN money has a retirement calculator that allows you to estimate how much money you need to save based on your current age, income, and retirement age. It is vital that everyone in our generation take hold of our finances early and begin to invest in retirement. We have to plan for retirement to make sure that we can retire and have the life that we want. Although Social Security should be available to us, we cannot depend on it and we have to plan accordingly.