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9 Ways Millennials Can Prep for Retirement


Is it a surprise that we Millennials are scared of retirement? Not only did we survive the Great Recession and a once-in-a-lifetime pandemic, but we’re also buried under debt. Moreover, unlike previous generations, traditional pathways to wealth, such as homeownership, are increasingly out of reach.

On top of that, we don’t have access to pensions or quality retirement plans from employers. And there’s a chance that Social Security won’t be there.

Despite all of these challenges, we still want to retire by 50. Is that actually possible, though? It could be if you start prepping for retirement using these nine strategies.

1. Set a goal for saving for retirement.

Saving for retirement can be simplified by following two simple rules. The first is to invest 10 to 15 percent of your income toward your retirement. Secondly, you should save enough to cover around 80 percent of your pre-retirement income.

However, without a personal retirement savings goal, it isn’t easy to know if you’re on the right path to funding your ideal retirement.

Think about your future when it comes to saving for retirement. For example, the average American life expectancy is about 79 years, according to the CDC’s National Center for Health Statistics. Therefore, if you plan to retire at 65, you should plan for your money to last for at least 15 years. In some cases, it takes even much longer, depending on your lifestyle, health, family history, and if you’re going to retire early.

It’s always a good idea to estimate your annual living expenses. At the minimum, this should include taxes, housing, food, and health care.

It is estimated that the average amount spent annually by “older households” (those headed by someone 65 or older) is $48,885. There are, of course, other factors to consider, such as where you live. For example, if you have a mortgage now, will you be able to pay it off by 65?

Don’t forget to budget for extra costs, like travel, gifts, hobbies, and entertainment. Then, if you add up your annual expenses, you can plug that number into an online retirement calculator to see how much you’ll need to save each month.

2. Pick a retirement account that suits your needs.

Millennials will not reach retirement age until well after 2034, when Social Security’s cash reserves are depleted. The chances of this happening are small, but it’s better to be prepared for the worst. In this case, they are saving for retirement without relying on Social Security.

In the retirement account world, you have a lot of options. So, let’s explore some of the most popular options available. And remember that you can often invest for your future using more than one.

401(k)

There’s a good chance your employer sponsors a 401(k) plan at work. If so, jump all over that. First, employees can contribute to a 401(k) directly from their paychecks before taxes. Then, until you begin taking distributions in retirement, the money grows tax-free.

Unfortunately, the IRS’s contributions to 401(k)s are limited each year. ‌A 401(k) plan in 2022 will allow employees to contribute a maximum of $20,500. ‌In 2022, the catch-up contribution will increase by $6,000 for individuals over 50. The funds are intended for retirement, so you’ll be charged a 10-percent penalty if you withdraw them before 5912. The withdrawals will also be subject to regular income taxes.

What is the best part of a 401(k)? There is something called an “employer match,” in which employers will also contribute to employee retirement accounts. For example, if you contribute 6% of your salary, your employer may match 50%. So if you contribute 6 percent, you will have 9 percent invested for retirement if you contribute 6 percent. It’s pretty much free money.

403(b)

As of 2022, this employer-sponsored retirement plan allows contributions of up to $20,500 — and $22,500, most likely in 2023. For those over 50, the 401(k) employee contribution limit should be $30,000 in 2023. There is sometimes a match offered by the employer as well.

You’ll also pay a 10-percent penalty if you withdraw your money before 59 ½, which is taxed at your ordinary income rate. Compared to a 401(k), this plan is for nonprofits and government employees.

Traditional IRA

Anyone with an income, including a spouse with an income, can open an Individual Retirement Account (IRA). Generally, contributions are made after taxes are deducted. But if you have an employer retirement account, you may be able to deduct contributions now, possibly reducing your tax bill.

In 2023, after two years of remaining at $6,000, the IRA contribution limit and catch-up contributions will rise to $6,500 ($7,500 if 50+). After that, however, your retirement savings grow tax-free, and your income taxes are only due when you withdraw them.

You have to pay a 10-percent penalty plus ordinary income taxes on withdrawals made before age 59 ½ — just as you would with 401(k) or 403(b) accounts. Some exceptions apply, such as payments for qualified college expenses or home purchases.

Roth IRA

As with a traditional IRA, you contribute after-tax cash, but you can withdraw the funds tax-free as they grow. Your contributions today cannot be deducted in any way. Because the gifts have already been taxed, you can withdraw them at any time without paying additional taxes. You will, however, be subject to ordinary income tax and a ten percent penalty if you withdraw your investment earnings before the age of 59 ½.

To contribute to a Roth IRA as a single individual, your Modified Adjusted Gross Income (MAGI) must be below $140,000 for the tax year 2021 and under $144,000 for the tax year 2022. For couples filing jointly, the MAGI must be under $208,000 in 2021 and 214,000 in 2022. Combined contributions to all your IRAs are limited to:

  • $6,000 if you’re under the age of 50
  • $7,000 if you’re age 50 or older

By checking this IRS table, you can find out if you are eligible to contribute to a Roth IRA.

SEP IRA or Solo 401(k)

Self-employed people or small business owners can also benefit from a Simplified Employee Pension (SEP). As of 2023, SEP-IRA contributions will be limited to $66,000 per year, up from $61,000 in 2022.

Employees deemed eligible to participate in your plan must also have SEP IRAs set up for them. Also, as you’re well aware by now, If you withdraw money before you turn 59 ½, you’ll pay regular income taxes and a 10-percent penalty.

Business owners with no employees, such as freelancers and solopreneurs, can participate in a solo 401(k). In addition, it offers the same high contribution limit as SEP IRAs. Finally, depending on your tax situation, you may be able to choose between a traditional version (pre-tax contributions that are taxed on withdrawal) or a Roth version (post-tax contributions that can be withdrawn tax-free).

The Roth solo 401(k) contribution can be withdrawn at any time without penalty, just like a Roth IRA. However, you will have to pay penalties and taxes if you withdraw investment earnings before you turn 59 ½.

Brokerage account

Brokerage accounts enable you to buy and sell stocks, bonds, and mutual funds through a brokerage firm.

Due to their non-retirement-specific nature, these accounts do not offer any inherent tax advantages. Therefore, you are responsible for closely managing your tax liability. However, you can withdraw money when you want, and there are no contribution limits.

There is no penalty associated with accessing the money before retirement. However, keep in mind that potential returns from the stock market may be lost to you.

3. Bring home the (extra) bacon.

It might not be top of your mind. But you could definitely use some extra dough to pay off your student loans or afford early retirement.

In my opinion, the fastest and easiest way to make extra money is through your current job. Examples include volunteering for overtime, asking for a raise, or utilizing your company’s referral program.

After that, you could find ways to reduce your spending, such as canceling subscriptions you never use. Another idea would be opening a new bank account. Some financial institutions may give you a couple of hundred bucks for being a new customer.

You could freelance, side hustle, or rent/sell items you already own. But, seriously. The sky’s the limit when it comes to picking up additional income.

4. Diversify everything you can.

Saving for retirement does not have to be one-size-fits-all. For example, it’s possible to have both a work-sponsored 401(k) and an IRA. If you take this route, you’ll have a high-yield savings account and a taxable investment account. In addition, your future self will be better protected if you have more accounts.

One of the best ways to protect your investments is to spread your money across multiple accounts and securities. In other words, don’t commit all your cash to one stock or asset. Instead, choose portfolios that diversify your money across various types of assets, such as stocks, bonds, and real estate, instead of high-cost index funds.

5. Be careful not to become a lifestyle creep.

“Lifestyle creep — when an individual’s increased income leads to increased discretionary spending — is a real thing, especially for millennials,” said Steve Sexton, CEO of Sexton Advisory Group. “Higher rents, mortgages, living expenses, and lifestyle preferences can ultimately impact your larger financial goals, like saving for retirement.”

You will need to stick to a budget if you want to stay on track with your retirement savings goals. And ideally, you should make every effort to live below your income. FYI, this doesn’t mean you have to go dumpster diving. In simple terms, living beneath your income means spending less each month than you earn. When you do, you’ll avoid debt and be able to contribute more to your retirement savings.

“Hold yourself accountable by checking on your finances quarterly to ensure you’re on track,” Sexton said.

6. Snag the best deals.

“By growing up in the .com era and the explosion of the internet, millennials know how to get deals and save on common products,” writes Matt Rowe in a previous Due article. Our first stop when shopping is often a clearance rack or tab on a website. Whenever we buy online, we do quick searches on Google to see if there are any discounts.

The result is a ten percent or twenty-five percent savings here and there. As a result, we can save a lot of money over time. The honey app, for example, takes a few seconds to check and saves us money.

“We also look for holiday deals or sign up for customer loyalty programs to get more discounts or free items,” he adds. Some will even go to thrift shops or second-hand stores for clothing and other fun items. “Regardless, millennials love to save, and millennials are savers because we know how to get deals on wants.”

Although getting deals on wants is excellent, let’s consider saving on necessities. If possible, we utilize student discounts or online coupons at grocery stores. In addition, we purchase in bulk at places like Costco to save money.

“We make lists of everything we need to avoid impulse buying unnecessary wants,” states Matt. Regarding renting and utilities, we look for ways to save, such as turning off the lights when we’re out or conserving water. Our fuel savings come from taking public transportation or walking and looking for free parking.

“These are small habits, yet they are still fast-acting and long-lasting,” Matt says. “Millennials are savers because we know how to get deals and how to save along the way.”

7. Spend less on housing.

Your house is probably the most significant expense and, therefore, the most effective savings opportunity. According to the Bureau of Labor Statistics, the average American’s housing budget consumes a third of their income.

When it comes to buying a new home, what should you consider? When you have a large enough home, you should keep it. If not, then do not buy the biggest house you can afford.

You can find out what you can afford using online calculators from BankrateNerdWallet, and Mortgage Loan. Using these tools, you can determine your mortgage affordability based on your income and other financial information. However, it is essential to remember that you do not need to borrow the maximum amount. If you want to maximize your savings, keep your housing expenses to 30% of your income or lower.

To help you with your home-buying process, here are a few additional tips:

  • First, work with a real estate agent. Despite signs of a cooling housing market, now is not the time to purchase without assistance. For first-time homebuyers, it’s essential to have someone who understands your concerns, needs, and problems.
  • To get the best mortgage deal, shop around with several mortgage lenders. Loan terms and conditions aren’t just about interest rates but also about all-in costs.
  • Stick to your budget. Again, a house beyond your means should not be a priority. Keep that budget going once you move, too. In a separate survey by Bankrate, millennial homebuyers expressed regret regarding unexpected maintenance fees. If some issues arise, you’ll want to be prepared.

8. Don’t be too aggressive with your portfolio.

Imagine retiring at the age of 50. When you are in your late 40s, you should be more conservative with your portfolio than your peers who plan to work until retirement. ‌When your finances are particularly fragile, you want to avoid a series of bad markets when you’re at risk. This is called the “sequence of return risk.”

Dr. Wade Pfau, professor of retirement income at the American College of Financial Services, believes this is why the first few years after retirement can be so rough.

“I’ve estimated that if somebody is planning for a 30-year retirement, the market returns they experience in the first ten years can explain 80% of the retirement outcome,” he told Barron’s. “If you get a market downturn early on, and markets recover, later on, that doesn’t help all that much when you’re spending from that portfolio because you have less remaining to benefit from the subsequent market recovery.”

How can this be solved?

“There are four ways to manage the sequence-of-return risk,” Dr. Pfau adds. “One, spend conservatively. Two, spend flexibly.” If you don’t sell too many shares during a market downturn, you’ll be able to manage sequence-of-return risk.

“A third option is to be strategic about volatility in your portfolio, even using the idea of a rising equity glide path,” he states. “The fourth option is using buffer assets like cash, a reverse mortgage, or whole life policy with cash value.”

9. Adjust your retirement plan as needed.

Make sure you are on track to retire comfortably by setting and revising your retirement goals. Despite not having just graduated college like some folks, you still have time to plan your retirement.

Consider how much money you will need to retire and how it will last you for the rest of your life. The correct retirement number can be found with the help of a retirement calculator. From there, take advantage of your resources now to figure out how to reach your goals.

Let’s say that your current employer offers a match. Can you increase your contributions now, or should you search for a new job that offers one? Do you plan to downsize to save on expenses, or can you pay off your home before you retire?

It’s okay if your plans change as you age since your life won’t look the same at 70. Keep in mind that it’s okay if things don’t go exactly as you planned. Make sure you have a backup (or two). You will thank yourself when you retire.

FAQs

1. What are the steps to retiring?

Leaving the workplace may be as easy as completing HR paperwork. Replacing a paycheck, however, is more challenging. If you want to know how to go from a steady income at the workplace to a retirement income from savings, you should speak to a finance professional. You can also ask them for help determining how much to withdraw from retirement accounts and when to do so.

2. When can I retire?

In a nutshell, you’re free to retire whenever you like.

There are, however, many limits to when people can leave the workforce in reality. A pension may only be available to some employees after working for the company for 20 or 30 years. To collect Social Security benefits, you must be at least 62 years old. Those receiving health insurance through an employer may wait until they turn 65 to retire since Medicare doesn’t begin until then.

3. What is a reasonable monthly retirement income?

The definition of a good retirement income will vary from person to person. To have a good retirement income, there are several factors to consider. Included in this are, at minimum, a planned retirement lifestyle, dependents, such as children or grandchildren, outstanding debts, and physical health.

Most people consider 70% to 80% of their last income before retirement a good retirement income.

4. Is there an ideal age for becoming debt-free?

Individuals are often advised to be debt-free by 45 years of age. What makes this age so important? Your debts should be limited to good debt, such as a mortgage, by 45. At this point in your career, you should start saving for retirement because retirement is where you need to be.

5. Should I retire early?

You are the only one who can answer that question. However, financial advisors can run through scenarios to assist a worker in determining the right time to retire financially. By considering these scenarios, you can figure out whether retiring early might result in a shortfall of money in the future.

Published First on Due. Read Here.

Featured Image Credit: Photo by Alexander Suhorucov; Pexels; Thank you!

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