Four Retirement Planning Tips for Millennials
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The financial crisis and painfully slow economic recovery have been especially hard on many young Americans, including members of the Millennial generation. Many Millennials are graduating college with crushing student loan debt and poor prospects for finding a good-paying job that utilizes the skills and education they acquired while in school.
While this scenario does not paint a pretty picture for the current income prospects of some Millennials, the picture is even worse when it comes to some Millennials’ future retirement prospects. According to a recently released study, the average recent college graduate won’t have enough assets to retire until he or she is 73 years old. In comparison, the current average retirement age is 61, or 12 years earlier than this projected retirement age for Millennials.
“Retirement might seem like a long way off for someone who is in their 20s, but the reality is that the sooner young people start saving for retirement, the more time they have to benefit from compound returns,” says David Lerner Associates Executive Vice President and Branch Manager Jonathan Jarow. “In fact, time is the greatest ally of young people when it comes to saving for retirement.”
Jarow offers the following four tips to help Millennials get started with a retirement savings plan:
1. Boost your financial literacy. In a financial literacy quiz, only about one in five (18 percent) young Millennials (18-26 years old) got either four or five out of five basic financial questions correct, according to the Financial Capability of Young Adults brief produced by the Investor Education Foundation. The results among older Millennials (27-34 years old) weren’t much better — only 30 percent of them got four or five questions out of five right.
Jarow says low financial literacy is an especially serious problem for Millennials because many of them will have to make most retirement financial decisions themselves. “This includes deciding how to invest money in an IRA or a 401(k) plan at work. In contrast, many of their parents and grandparents had pensions in which most of the investment decisions were made for them.”
2. Start saving now. The biggest advantage young people have when it comes to saving for retirement is time. “So, utilize this advantage by starting to save for retirement now,” Jarow urges. The news here is actually somewhat positive, as about 6 out of 10 Millennials (61 percent) consider themselves to be savers, according to a recent survey conducted by Wells Fargo.
An example helps illustrate the importance of getting an early retirement saving start: A 20 year old will build a retirement nest egg worth $1 million by age 65, if he starts saving $361 a month at this age (assuming a six percent average annual return). But if he waits just five years until he’s 25, he has to save $500 a month to accumulate $1 million by age 65. And if he waits until he’s 30, he’ll have to save $699 a month.
3. Get out of debt. Many Millennials are dealing with heavy debt loads, including student loan debt. The median student loan debt for college graduates today is $23,300, according to a study conducted by personal finance website NerdWallet. However, this debt will actually cost students more than $115,000 by the time they retire when you consider that they will be paying off debt during this life stage instead of putting this money toward retirement, the study projects.
4. Understand the reality of the Social Security situation. Many Millennials seem to grasp the fact that Social Security as we know it today may not be available to them when they retire. In the Wells Fargo survey, more than a third of Millennials said they don’t expect to receive any retirement income from Social Security, and 21 percent say they have no idea how much money to expect from Social Security when they retire.
One expert predicts that Social Security will still be available to Millennials when they retire, but benefits will be lower and the retirement age will be higher. “In general, most Millennials should not plan their retirement finances around Social Security,” says Jarow.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC