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This is a guest post from Pauline of InvestmentZen
I know what you’re thinking. Millenials are young, some of them have barely just entered the workforce, shouldn’t they have other financial priorities than planning for retirement? Well, not really. First, there is no guarantee 30 years from now that you will still be able to count on a check from Social Security. And with said check amounting to around $1,250 on average, there isn’t room for an extravagant lifestyle either.
Plus, with time on your side, it will be much easier to save a little money right now than a ton of money in your mid 40s, while paying for your kids to go to college and that huge house you’ve always dreamed of. How do you start? Enter the ultimate millennial retirement guide.
In this millennial retirement guide, you’ll see the 4 steps to grow your retirement account to seven digits and become a millionaire.
Table of Contents
Millennial Retirement Guide
#1. Define Your Retirement Number
How much do you need to retire and keep your lifestyle? Your expenses are likely to grow, taking into account kids and healthcare, but since you won’t be earning an income anymore, you won’t be paying much in taxes, and your mortgage should be paid off as well.
How much you need to retire will define the amount you need to save each month to get there. Based on a 4% safe rate of withdrawal, you will need to save 25 years of living expenses in order to get that income in retirement for as long as you may live. Oversimplifying things, saving 25 years worth of expenses in the next 30 years means a saving rate close to 100%. Thankfully, compound interest and other tricks will help us slash that amount.
#2. Kill Your Debt
The next step in the millennial retirement guide is to get out of debt. You won’t be able to start building wealth if you are still carrying high interest debt. Whatever money you’d make investing, even at 8-9% returns, you’d be giving to your lender and their 14.95% APR credit card. You need to start by eliminating your expensive debt. Getting a balance transfer will help you achieve that faster, since you’ll stop paying interest for 12 months or more. Throw every bit of extra money at your principle, and if you’re not done when the deal end, find another transfer card.
You can also refinance your student loans and your mortgage, even if you keep paying them over the next few years, being able to lower their cost by even half a point can save you thousands over the life of the loan. Keep making the same payments you used to before the refinance, and your mortgage will be paid off months or years earlier.
#3. Maximize Your Lifetime Earnings
As a millenial, you have your whole productive life ahead of you. You might think saving $10,000 per year for retirement is impossible, because you don’t make enough, and that is perfectly understandable. Starting salaries aren’t that great. But you’re making life work on whatever you’re making right now, correct? So if you were to get a $10,000 raise, could you keep living on this year’s salary, and save $10,000? It is always tempting to spend money when there is more on your account, so you can make the raise disappear into your brokerage account right when you get paid. You won’t see the money in checking and you won’t miss it.
A one time $10,000 raise over the next 30 years means $300,000 more income. That buys you a great house in most states. Do your job the best you can, and if your boss is reluctant, go look for a better paying job somewhere else. Changing companies when you’re young is a great way to get 20-30% pay bumps each time. And that can make a big difference on your savings.
Because for as much as you might cut back on little expenses to save $5 here and there, that won’t beat a salary increase. No need to go back to college for a six figure MBA, keep reading, try to solve problems at work other people struggle with, and soon you’ll get noticed.
You can also start a little business on the side, so many money making ideas don’t require you to invest upfront. If you are good at something, people are likely to agree to pay you for that. Be it repair their car or computer, teach their kids Spanish, paint their house, etc. A little creativity and you can make a nice little income on the side.
#4. Maximize Your Investments
The final step in the millennial retirement guide is investing. One way to get an instant 100% return on your investments is to get your company match on 401k contributions. On top of that, contributions are pre-tax so if you’re in the 25% tax bracket, a $100 contribution will only cost you $75 from your net pay. If your employer matched it, you just invested $200 at a cost to you of $75.
Investing doesn’t have to be complicated. You just need to consistently add money to your retirement account, and if you pick a variety of index funds, you can expect decent return and little risk. Hand picked stocks are often hit or miss, and trading fees can be higher. So keep it simple, invest and save, max out your 401k and Roth IRA, and 30 years from now you should be all set for retirement.
Saving a million dollars for example, will require you to save $700 per month, assuming a return of 8% over the next 30 years.
This is not so hard if you get a company match. According to Wikipedia, “As of 2013, the most common matching program increased to 100% of the first 6%”. With the median salary around $50,000, that means a match up to $3,000.
So in order to save $8,400, if you make $50,000 and are in the 25% tax bracket, you will only need to save $4,050 of your net pay, or $337.50 a month. ($8,400 – $3,000 company match is $5,400 gross, $4,050 net).
Yes, you can retire a millionaire on just over $10 a day!
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
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