Retirement Strategies for Millennials
Retirement may seem far away, and you have decades to prepare. But to enjoy a long, financially secure retirement, consider spending less of your income now to save more today. Your future self will thank you. The good news is that seven out of ten millennials believe themselves to be savers—not spenders— and currently prioritize financing an emergency fund or a vacation, and 54% report they have a budget. Yet, despite these good habits, some still delay their retirement planning.
While that emergency fund you're saving toward is essential, waiting to invest in retirement may not be the best choice. By only contributing to a traditional savings account, you could miss out on tax benefits and the potential to grow your nest egg with a retirement savings account.
Three out of four Millennial workers (76%) are already saving for retirement in a 401(k) or similar plan, according to the 22nd Annual Transamerica Retirement Survey of Workers published in 2022. A 401(k) is a retirement savings plan offered through an employer. You can choose how much you'd like to deduct from each paycheck—before taxes—and employers will often match a certain percentage of your contributions. Your employer's fund manager typically chooses investments, though you likely have some choice in how aggressive or conservative you want those investments to be. On average, those millennials participating in a 401(k) or similar plan contribute 15 of their annual pay. The maximum contribution for millennials in 2023 is $22,500.
An individual retirement account (IRA) is tax-deferred retirement savings you establish on your own or an employer may offer. SIMPLE and SEP IRAs are employer-sponsored, whereas individuals open Traditional and Roth IRAs independently. Unlike other retirement savings vehicles, a Roth IRA is funded after taxes, allowing you to take retirement withdrawals tax-free. The contribution limits vary between the different IRAs. See the IRS website for the latest contribution limits.
Almost three-quarters of Millennials (73%) agree that personal values guide investment choices. However, studies show many Millennials are wary of investing in the stock market. According to Ernst & Young's 2023 Global Wealth Research Report, 47% of Millennials fled the market and went into cash last year, whereas 34% of Gen X and 24% of baby boomers did the same. Of course, investing has risks, but history shows that seven out of the ten best market days happened within two weeks of the ten worst days. As such, investors who missed out on the top 10 days of the S&P 500's rally in the past two decades saw only half the gains of those who stay invested. Young professionals have the advantage of the time to earn and save toward retirement, and in the event of poor performance or a bad market, there's also more time to recover. And you don't have to be an investment expert. A financial advisor can help you choose a portfolio aligned with your goals and risks.
In a recent Schwab 401(k) study, millennials indicated they expect to require $1.8 million for retirement. The reality is that everyone's needs and goals are different, and there is no one-size-fits-all retirement plan. To begin planning, outline your vision for retirement, anticipated expenses, and long-term healthcare needs. If you need help figuring out where to start, consider contacting a financial advisor who can track current budgeting and spending habits, identify goals, and increase your confidence in your retirement plan.