Millennial’s guide to retirement
Your retirement still seems to be way off in the future, especially when Mondays drag on for eons. But retiring is something you should actively prepare for (unlike a zombie apocalypse). Building a solid nest egg takes time, and lucky for you 20- and 30-somethings, you have enough time to do it right! Here are a few of the basics to get you on track toward a comfortable retirement.
Compound interest – Your savings BFF
Compound interest is the process by which money grows exponentially due to interest building upon itself over time. Basically, you earn interest on your interest, leading to massive moolah over time. Here’s the proof:
- If you start investing at $100 per month with an average return of 6% per year (compounded monthly) over 30 years, you’ll have $100,954.
But what if you put off retirement planning for a few years? You should be able invest more per month at the end and catch up, right? Wrong.
- If you invest $200 per month for 15 years, also averaging an annual return of 6% (compounded monthly), you’ll end up with only $58,455.
That’s a difference of over $42,000! Start retirement planning ASAP. Time is money, honey.
Save, save and save some more
Ideally, you should put away 10% – 15% of your annual salary for retirement. That may seem like a lot when budgeting for important things like rent, student loans, avocado toast, and child care (you know, the essentials) but saving now pays off in the long run – big time.
If you can’t afford to put away 10% right now, don’t worry, you’re not doomed to work forever. Start saving what you can – even as low as $5 a month – and increase each month by an amount you’re comfortable with until you’re putting away the 10% – 15% you’ll need to retire.
If you already have a set monthly budget and a good savings plan, think of extra income as a shortcut to a quicker retirement. Got a raise? Took on a side gig? Won a talent competition? Use any extra influx in cash to increase your retirement savings.
Protect your retirement savings by establishing an emergency fund to cover unexpected expenses. Stash away 3 to 6 months of living expenses in a savings account or money market fund, so you can pay for unforeseen medical bills, car repairs and more, without accumulating credit card debt or dipping into your retirement savings.
Retirement funds: Opt in
If your company offers a 401(k), sign up now! If your employer matches contributions, even better. Be sure to contribute enough to capture the maximum amount your employer will match, unless of course you don’t like free money.
If your company doesn’t offer a 401(k), or you’re already maximizing your contributions (kudos to you), consider setting up an individual retirement account, or IRA. There are two basic types, traditional and Roth. Both allow you to make regular contributions and watch your money grow, but they have different tax advantages and limitations.
Want to know more about retirement funds? Learn the ins and outs of 401(k)s & IRAs.
Put your savings on cruise control
Whenever possible, take saving decisions out of your hands. Direct a certain percentage of your paycheck into an investment account and force yourself to live off what is left. This guarantees you won’t skip or miss a month and will help you keep your retirement planning on track. If you never actually see the money, it’s much harder to waste.
Invest aggressively (in the beginning)
When you start early, time is on your side. You can afford to be a little more aggressive and take bigger risks with your investments. Stocks lead to greater returns over time and you can handle the short-term ups and downs of the stock market far better than someone who’s hoping to retire tomorrow. As you get closer to retirement age, you’ll want to move your money into less risky investments.
Saving for retirement is one of those things that all too often falls into the out-of-sight, out-of-mind and easier-said-than-done categories. But imagine your golden years – are you seeing the world and sipping margaritas? We sure hope so! The choice is yours. Please share your comments or questions below!