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When you’re young, full of energy, footloose and fancy free it’s tough to think about retirement. After all, as a millennial you’re probably close to four decades from retiring. As tempting as it might be to put off saving for those golden years you have one big factor working in your favor – time. And if you don’t start taking advantage of it now, it’s likely that you won’t be able to retire when you had hoped and it may be under less-than-ideal circumstances. In fact, one study estimates that today’s college grads won’t be able to retire until they are 75 as compared with today’s average retirement age of 62. If working until you’re 75 doesn’t sound very appealing there are six things you need to do to retire rich.
1. Create a budget that prioritizes retirement savings
We understand it’s hard to save money what with student loan debt and rising rents but you need to make saving for retirement a part of your financial planning as soon as you can. You may feel a little pain now from tightening your budget to squeeze out some savings but this is much better than realizing only too late that you haven’t saved enough.
The best rule of thumb
The best rule of thumb is to try to save 10% to 15% of your take-home pay for retirement. However, it is okay to save less. Saving a little bit of money every month – if that’s all you can do – is better than not saving anything. One financial expert suggests that you start by saving five dollars every month until you’re comfortable with this and then add something more. When you start small like this it’s likely you won’t even notice the money is gone.
Saving something for retirement sooner is even better than saving more later on. For example let’s say you’re 30 years old. If you could save $100 now and then add another hundred dollars to this every month for the next 35 years you’ll have $142,302, assuming you can get a modest 6% annualized return. But if you wait until you reach 40 to start saving and even double your savings to $200 a month, you’ll end up with only $138,825 – at age 65.
2. Capture your employer’s 401(k) match
If your employer offers a 401(k) and will match your contributions up to a certain percentage, this is where you should first start saving. And you should, without question, put enough in your account to capture the company match. As an example of this let’s say your employer contributes fifty cents for every dollar you contribute up to 6% of your salary, which is pretty common. This means you should defer that same 6% to your 401(k). Your savings will then add up to about 9% of your pay – the 3% from your employer and the 6% from you. That would leave you something short of the goal of saving 10% to 15% of your salary but would certainly be close enoiugh.
3. Start a Roth IRA
If your employer doesn’t offer a 401(k) or if you have maximized the contributions to your 401(k) then you should start a Roth IRA. It’s different from a traditional IRA because the money you put in is taxable income but you can withdraw money from it at any time and without paying any taxes or penalty. While you would definitely not want to withdraw money from your Roth IRA until you reach retirement it’s sort of nice to know that the money will be there in the event of a serious financial emergency.
Most banks and brokerages will help you open a Roth IRA. However, spoiler alert – you must have earned income from a job and if you’re single have a household modified adjusted gross income of less than $132,000. That figure goes to $194,000 if you’re married and are filing jointly. The maximum you can contribute to a Roth IRA is $5500 a year. However, once you reach age 50 that jumps to $6500.
The following video explains more about an IRA and makes the case that it’s the smartest way by far to save for retirement.
4. Automate it
You can put your savings on autopilot, which is the easiest way to save each month. If you have a 401(k), your employer will move pretax dollars out of your paycheck before you even see the money. If you’re saving money through a Roth IRA, you should take advantage of automation by setting up automatic transfers from your bank to your brokerage account. The sad fact is that if you rely on yourself to put money in your savings account manually, it just may not happen. But when you automate your savings you eliminate the temptation to spend that money and it guarantees you will be paying yourself first.
5. Invest carefully
It’s important for a millennial to make smart investments within a 401(k) or Roth IRA. At this point you should probably stick with funds. And choose ones that have low expense ratios so you will get a bigger return over the long run. One of the best and safest way to invest is with index funds across a variety of asset classes to ensure diversification. Of course, because you’re young you can afford to take some risks so you might consider also building a portfolio of 80% to 100% stocks.
6. Boost your savings on a regular basis
Last but certainly not least be sure to boost your savings regularly until you reach the 10% to 15% level. For example, every time you get a raise you could boost your savings. You can also do this anytime you earn extra income such as bonuses.
It’s just not that complicated
See, retiring rich for a millennial is not all that complicated. Do the six things you just read in this article and it’s practically guaranteed that you’ll have a nice, stress-free retirement and not one where you’ll be working part-time when you’re 70 because you failed to save enough for those golden years.
