The Millennial’s Guide to Retirement Planning

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

Getting to retirement or a “work optional” stage of life might seem too far away to worry much about. After all, you’ve got a lot to accomplish in the meantime. There are student loans to pay off, for starters. But there are also far-flung countries to visit, a career and house to manage and maybe a family to support. Seriously, it’s hard enough to juggle plans for next week, let alone 30 years from now. That’s especially true when you’re focused on today’s bills.

The retirement planning numbers can be daunting. In a 2024 Northwestern Mutual Planning & Progress study, both Gen Z and millennials expect to need more than $1.6M to retire comfortably. To achieve a number like that, it’s important to get started relatively early. That’s because of the inescapable truth and beauty of compound interest. Basically, $1,000 saved today will typically be worth a lot more when you get to retirement than $1,000 that you save 10 years from now.

And let’s face it: Lots of millennials are doubtful about getting any retirement income from Social Security—though Northwestern Mutual expects that it’ll continue to pay out at a significant level even if the trust fund runs out of money.

Whether you’ll get Social Security or rely solely on your savings, let’s dive into some key steps you can take now to make sure you’re well positioned for retirement success. Here’s our millennial’s guide to retirement planning.

Save for retirement now—in a tax-friendly way

Thanks to compound interest, the sooner you start saving for retirement, the better. If you’re working full time, there’s a good chance you’re already enrolled in your employer’s 401(k) savings program. If you aren’t yet, do it. Basically, a chunk of each paycheck will go directly into a tax-advantaged retirement savings account that’s invested in a fund or funds that you choose. Often you can pick a fund, like a target-date fund, that’s tailored to your age.

The beauty of a 401(k) is that you don’t pay any taxes on your contributions, and all the growth over time is shielded from taxes as well. (If you don’t have this option at work, you can open your own IRA.) This tax approach lets you spend a bit more today, but the trade-off is paying taxes when you make withdrawals. If your employer matches your contributions, then try to contribute enough to get the full match—it’s essentially free money. If you can’t, don’t worry! Just put in what you can. Every contribution counts, especially over long time periods. As you pay off debts or get raises, work to up your contribution little by little, maybe 1 percent each year.

And experts recommend you keep up the habit, even if the markets are down. For your retirement fund, it’s wise to have a lot of time in the market versus trying to time the marketing through buying low and selling high.

In addition to traditional retirement accounts like 401(k)s or IRAs, you could also contribute to Roth accounts. With a Roth IRA or Roth 401(k), you pay taxes on your contributions upfront, but those withdrawals will be tax-free down the road. (From a tax perspective, it’s the inverse of an IRA or 401(k).)

Strategically pay down debt

If you have debt (and most of us do), it can feel like a weight that’s preventing you from reaching your other goals. Build a plan for your debt. That can mean:

• Strategically paying more than the minimum each month (prioritize extra payments using a strategy like debt snowball or avalanche).
• Concentrate on “bad debt” from credit cards and other high-interest sources, along with any accounts where you may have had a history of delinquency or late payments.
• Consider refinancing student loans or a mortgage and moving balances to lower-credit-rate cards.

Keep this up month after month, and it’s like compound interest in reverse—your debt shrinks faster and faster with the same payment. As your debt shrinks, you’ll eventually have more funds available for other goals, like saving for retirement or even that exotic trip. One way to stick with a strategic repayment plan is to automate your payments. That way, it’s out of sight and out of mind.

Build your safety net

Once you start paying down your debt and funneling a healthy amount of money into your 401(k) each month, it can be easy to sit back and think you’re set for retirement. And if life goes exactly as planned, you’re probably well on your way.

But life can be unpredictable. A car accident, job loss or health scare can easily knock your retirement savings off track. Preparing your retirement savings for the unexpected is a critical but often overlooked aspect of saving for retirement. Make sure you have health, auto and homeowners or renters insurance. Here are a few additional safety nets to consider:

An emergency fund

When one of those “what ifs” strikes, you don’t want to be dipping into your retirement savings to cover your costs. You’ll get tax penalties on the withdrawal unless you’re at least age 59½—and even if you can replace the money later, you’ll lose out on the opportunity for compounding interest. That’s why it’s important to set aside some money (a good rule is to set aside about three to six months of your total monthly expenses) in a savings account.

Disability insurance

Your monthly contribution to your retirement savings comes from your paycheck. But if you get injured or sick and can’t work for several weeks or more, those retirement contributions will stop (not to mention you might have to dip into savings just to pay for the things you need). That’s where short- and long-term disability insurance comes in. It will replace a portion of your income if you are injured or sick and can’t work for several weeks or more.

Life insurance

When you’re young and single, life insurance may not seem like something you need. But if you’re considering getting married and having a family someday, you’re probably going to want it in the future. Life insurance can protect your family’s financial plan if you ever pass away. So, you can just wait on this one, right? Well, not exactly. There are a couple reasons why it’s a good idea to get a life insurance policy now:

• You’re relatively young and healthy. The cost of life insurance (and your ability to get it) is based on your age and health. Given that you’re still fairly young and healthy, a policy will be less expensive (on a monthly basis) than it will be in the future. You may want to start with some term life insurance and add whole life insurance, or plan to convert your term into whole life.
• It can help you save. With whole life insurance, in addition to the death benefit (and ability to add to your coverage in the future), you also accumulate cash value. Cash value grows in a tax-advantaged way, and you can access that money for anything you need throughout life. It could become a portion of your emergency savings or something you use to help pay for college someday. But—because cash value never declines with the market—many people hang onto it and use it to help create income in retirement.

Other financial tools

There are even more financial tools you can use to get ready for retirement. They can be great companions to your 401(k) or IRA, especially if you hit the contribution max on those accounts.

An investment tool like a brokerage account allows you to invest in things like stocks, bonds and mutual funds. You can withdraw funds at any time without the tax penalties you’ll face with a retirement account. That makes a brokerage account ideal for medium-term goals like a home purchase or major renovation. (But you’ll need to pay capital gains taxes on any profits.)

For short-term financial goals, a high-yield savings account can be a great choice. These accounts offer higher interest rates than traditional savings accounts, are low-risk and provide Federal Deposit Insurance Corporation protection up to $250,000. They are also liquid, which means they allow easy access to your funds when needed. You’ll want to keep an eye on potential fees and minimum balance requirements.

For another safer investment, consider certificates of deposit (CDs). They offer a fixed interest rate for a set period, and your principal is protected. They are a good option if you want to lock in a rate and don’t need immediate access to your funds.

Enjoy today

When you have a lot of financial priorities, it can seem like you don’t get to spend any money on yourself today. But financial planning and saving for retirement isn’t just about some far-off goal. It’s about balancing those long-term goals with the things you want today. So, when you’re budgeting what you’ll contribute toward your retirement, debt and other bills, make sure you also set aside some money for fun today. Your Northwestern Mutual financial advisor can get to know you and build you a financial plan that includes strategies to take advantage of opportunities and protect you from potential blind spots. The plan will help you balance your future goals with what you need today.

All investments carry some level of risk, including loss of principal invested. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value will reduce the death benefit and may affect other aspects of the policy.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.