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Millennials saving for uncertain future
How are millennials (we) saving for an uncertain future? According to an article by Michael Douglass from CNNMoney, millennials are saving earlier for retirement than their parents were. This is great news for us, but unfortunately the financial outlook is dimmer than in years past. In fact, recent figures from the Employee Benefit Research Institute state that millennials may need to DOUBLE how much we are saving for retirement. This is due in part to expert projections of how the stock market will perform in years, and decades to come. Experts have stated they expect to see a steady decline in average stock gains. In addition to the declining stock market, Social Security might not be available for us when we turn 67.
What to do with such a glum outlook? Well, first things first, you need to have a plan. Do you know how much money you need to save for retirement? Does your job offer a 401k plan with a match? If not, have you considered opening an IRA and investing in mutual funds? Experts say you should be saving roughly 10% to 15% of your income to live comfortably in retirement. Some experts suggest as much as 25% to ward off the potential financial woes of the future economic climate. Starting earlier is better, so the sooner you can start saving, the better off you’ll be. Even a few years can make a substantial difference.
Here are a few quick tips to help you along your path to retirement:
- Have a plan
- Know your retirement savings goals
- Pay yourself first – set aside a planned percentage of money from each paycheck (preferably at least 10-15% or more, if possible)
- Talk to a financial advisor about your situation (they can be free of charge)
- Perform regular assessments of your retirement accounts and contributions to make sure that you’re on track for your goals
- Adjust your contributions as necessary to meet your goals
- Don’t live beyond your means – if you are living paycheck to paycheck, reassess your situation and find ways to make cuts or, better yet, increase your income earning potential
Retirement savings plan
Investment experts suggest you should save double your annual income by the age of 35. The chart below is an “estimated” projection based on a starting annual income of roughly $35k at age 21, with regular 3% annual cost of living raises, a regular contribution of roughly 10% of your paycheck, and a 3% rate of return from your retirement account.
*The retirement chart is for illustration purposes only, and not to be used as a guidepost.
Note: This blog post is intended as informational only, and is not investment advice, consult a financial advisor before making any financial investment decisions.
When should I start saving for retirement?
When you are young, retirement is likely the last thing on your mind but planning for it shouldn’t be. The earlier you start saving, the more time your money has to grow and the more financially healthy you’ll be in your retirement years.
The magic of compound interest
The biggest benefit to starting early is the value of compounding interest. Compounding interest is when the earnings of an investment are reinvested into that same investment and continue to grow. It’s like earning interest on interest, and it can lead to substantial investment rewards. The critical component in compounding is time. In fact, the amount of time you have even outweighs the amount of money you invest.
Here’s an example: let’s says you want to start saving and invest $1,000 with the credit union. You also decide to save $150.00 each month after that. After 30 years, assuming the average interest you’ve earned is around 5%, you’ll have over $125,000! The total amount of money you invested was $55,000, but through the magic of compounding interest, you were able to earn an additional $70,000.
If you follow the same scenario but only save for 15 years, your total is only $40,000, and your net return is $12,000. Those extra years make a BIG difference so the sooner you start, the better. Want to run the numbers for yourself? Check out this calculator to see what compound interest could do for you.
If you do want to start investing, here are two common ways to get started.
Ideally, you’ll be able to start saving as soon as you begin earning a paycheck. If you employer sponsors a 401(k) plan, that’s a smart option, especially if they offer a matching contribution. The money you contribute to the plan is automatically deducted from your paycheck and deposited into your 401(k) account before it’s taxed which allows you to save a little more. It also lowers your current tax liability since you won’t have to pay taxes on the contributions or the earnings until you take a distribution from the account. Generally, a company will match your contribution to the plan up to a designated percentage. It’s essentially free money so the sooner you take advantage of this benefit, the better.
Another way to start saving for retirement is by contributing to an IRA. With a Roth IRA you contribute after-tax money to the account, but any money withdrawn later is tax-free. You can also arrange for a monthly direct deposit into your Roth IRA which will help you stick to a savings plan. If you’re self-employed, you have the option of opening a SEP IRA. You won’t have the benefit of a company matching contribution, but it will still offer the ability to save on a tax-deferred basis.
The sooner, the better
When it comes to compounding, time is your friend. The smartest step you can take today is to start saving for tomorrow. It doesn’t take a lot of effort, especially since most retirement savings plans are set up for automatic investment. Just remember, the earlier the better because tomorrow will be here sooner than you think!
How Much 20-Somethings Should Save for Retirement
Your 20s may seem like an odd time to think of saving for retirement, but it’s actually the perfect moment to start planning for your later years. That’s because the earlier you start saving, the more time your money has to grow.
Savers who begin setting aside 10% of their earnings at 25, for example, could amass significantly more by retirement age than those who wait just five more years to start saving. You can use a retirement calculator to see how much you should start saving now to reach your retirement goal.
Building a nest egg on a starter salary and a shoestring budget can seem daunting, though. Focusing on the incremental savings, rather than the goal, can help your savings objectives feel more manageable.
How much to save for retirement
For those earning around $25,000 a year, the median income for 20 to 24 year olds in 2015, saving the recommended sum of 10% amounts to a little more than $200 a month.
It may seem like a reach, but consider this: If you start saving $100 a month at age 25 and invest it to return 7.7% a year — the average total return of the Standard & Poor’s 500 Index of U.S. stocks over the past decade — you’ll have more than $378,000 available at retirement age. And it could be tax-free.
If you wait until you’re 30 to start and save the same monthly amount at the same rate of return, you’ll wind up with less than $253,000.
Several vehicles can help you build a retirement fund. A 401(k) plan, typically offered by your employer, is often the most convenient and easily accessible of these. Contributions you make usually aren’t taxed, which helps reduce your income tax liability.
Pre-tax 401(k) accounts make up around 80% of retirement plans offered by employers, according to the American Benefits Council. Roth 401(k) accounts are another option, though these are less widely available, and money contributed to a Roth 401(k) account goes in after it’s taxed. Money withdrawn from this type of account — including earnings — is usually tax-free.
Companies that offer a 401(k) plan often match employee contributions, up to a certain percentage. This is essentially free money toward your retirement.
If your employer will match your contributions, try to take full advantage and commit a large enough percentage to get the full benefit.
Beyond a 401(k), individual retirement accounts, commonly referred to as IRAs, offer another solid option. There are two types: traditional and Roth.
Money put into a traditional account is tax-deferred, similar to funds put in a traditional 401(k) plan. That means those funds aren’t taxed until they’re taken out. But typically any earnings you make with the money are also subject to income taxes on withdrawal.
Money put into a Roth IRA has already been taxed when you earn it, so there’s no immediate tax benefit. When it’s time to withdraw the cash, however, you usually don’t pay taxes on it. And anything the money earns also can be taken out tax-free.
Contributions to both types of IRAs are currently capped at $5,500 a year for those under age 50, and $6,500 for older workers.
How much to save for emergencies
In addition to retirement, it’s also wise to save for a rainy day. Ideally, your emergency fund should be enough to cover three to six months of living expenses.
Some experts suggest setting aside even more for savings and investments: 20%. That’s roughly $415 a month on an annual income of $25,000.
That’s not always feasible, especially if a big chunk of your monthly income goes to student loan and credit card payments. Consider saving what you can, even if it’s just $10 a month.
Making a habit of saving now could serve you well down the road. And, as your income increases, the percentage you save can as well.
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