Millennials and Retirement: What You Need to Know
August 18, 2015 | Your Finances
Whenever I talk with Millennials about the importance of long-term financial planning, they often tell me that the furthest thing from their minds is retirement. I understand: It can be difficult to contemplate saving for something that seems light-years away, especially when there are so many other demands on their entry-level salaries.
But if you’re a younger American and feel you have all the time in the world to start investing for retirement, here’s a simple fact: When you start saving has a much greater impact on your financial future than how much you are saving. Here’s a hypothetical example to illustrate what I mean.1
Let’s say two friends, Miguel and Anna (both age 25) started working at the same time. Miguel immediately signed up for his employer’s retirement plan and started contributing $250 a month ($3,000 a year) until he retired at age 65.
Anna decided to wait 10 years before saving for retirement. When she got started, she also contributed $250 a month and continued to do so every month until she turned 65. Both she and Miguel earned an average return of 7 percent on their money.
Of course, you’d expect Miguel to have more money at retirement than Anna—after all, he had a 10-year head start saving. What may surprise you, however, is how much more Miguel was able to accumulate. At age 65, his account was worth $660,031—more than double the $306,772 that Anna was able to accumulate. The difference can be attributed to the power of compounding and the extra growth it gave to Miguel’s savings early on.
The good news is that Millennials understand that saving is important. When Northwestern Mutual conducted its annual Planning and Progress Study this year, we found that 64 percent of Millennials say they are more inclined to save than spend, and more than half of younger respondents say they’ve set financial goals, compared with 38 percent of Americans age 35 and older. The not-so-good news is that many are focused on near term needs and not the future.
If you are part of the large number of Millennials who haven’t focused on retirement yet and are unsure of the best way to go about it, here are three things to keep in mind.
1. You don’t have to choose between saving for retirement and other priorities. You can participate in your retirement plan at work and still pay down your debt and have fun with your friends; you simply need to find a way to balance your needs and wants.
If your company offers a matching contribution to its retirement plan, start there by contributing enough to take advantage of what is essentially free money from your employer. If you think you can’t afford to contribute that much, take a look at your weekly spending. Consider downsizing your Jamba Juice or Starbucks habit, cutting back on the number of meals you eat out each week, or planning getaways that are closer to home. The goal isn’t to cut excitement from your life, but rather to find small ways to redirect your spending and turn it into savings that can help build financial freedom for your future.
2. Saving is easier when you put it on autopilot. It can be difficult to stay on track financially, especially when you have competing demands on your money. By participating in your retirement plan at work, you can put your financial future on autopilot. Your contributions are automatically taken out of your paycheck, before you have a chance to spend the money. This disciplined approach to saving effectively forces you to live within (or below) your means in a relatively pain-free way. The old adage is true: You can’t miss what you never had.
3. Don’t let the stock market spook you. There’s a lot written about why Millennials favor cash over stocks. While this conservative savings approach may protect your money from the impact of market ups and downs, it doesn’t provide you the same opportunity for building long-term wealth as an individual who diversifies his or her portfolio. Sure, volatility can be unsettling, but as a Millennial you have plenty of time to recover from any dips in the market. If you’re hesitant about investing, meet with a financial professional to go over your near and long-term goals and determine an asset allocation for your investments that makes sense for you.
There’s no denying that Millennials have a lot of demands on their limited financial resources. However, the sooner you start saving, the more flexibility and freedom you may have to pursue adventures and opportunities along the way.
1This is a hypothetical example intended to illustrate the concept of compounding. It is not representative of any specific investment or investment account. Actual investment account value will fluctuate and may be worth more or less than the original investment.