Many millennials understand that retirement for their generation will look different than for their parents. Specifically, millennials expect to shoulder more of the burden themselves.
More than a third (35%) of millennials expect Social Security to represent zero percent of their monthly retirement income compared to only 15% of baby boomers, according to a Wells Fargo survey of millennials. As millennials experienced the fallout of the Great Recession, 8 out of 10 of them said it taught them they have to save now to survive economic problems down the road.
Despite these sentiments, only slightly more than half of millennials (55%) are saving for retirement. Those that aren't saving expect to begin at an average age of 35. The top reasons for not starting to save for retirement included not having enough money to save (84%), other more immediate priorities (81%), and the need to pay off debts first (77%)
But if you don't start saving early on, how will you ever retire? Roxana McKinney, a financial advisor with Strategies for Wealth, discussed how to uncover opportunities to save more for retirement at the "The Millennial's Guide to Retirement" event at CommonBond's New York City headquarters on March 16th.
If you're not creating breathing room in your budget on your own, try an app that can do it for you, McKinney said.
Here are two she recommends:
- Digit monitors your spending habits and, when it determines you can safely afford it, transfers a small amount of money (typically between $5 to $50 every few days) from your linked checking account to a special Digit savings account.
- Acorns rounds up to the nearest dollar on every purchase you make with a linked checking account and automatically invests the change into a diversified portfolio for you. You can customize your risk tolerance and adapt your investments based on personal preferences.
Beyond apps, you may find room in your budget to save for retirement if you refinance your debt.
If you have student loans, refinancing could save you thousands of dollars. For example, when you refinance your student loans with CommonBond, the average CommonBond member could save thousands over the life of their loans. "That savings can be going to retirement," McKinney said. Sign up for a free seminar to learn more about how to refinance your student loans held at CommonBond's New York City headquarters on Wednesday, March 30th, 6:30 p.m.
If you have credit-card debt with high interest rates, you may be able to consolidate that debt to a lower rate. (As a benchmark, the average rate on a variable-rate credit card is 15.92%, according to Bankrate.com.) Many credit-card issuers provide zero-percent transfer offers, but those deals typically expire after 12 months. Personal loans are a great alternative for debt consolidation if you need more than 12 months to pay off your debt. Rates from personal loan providers on Bankrate.com for someone with good credit—defined as a person with a FICO score between 680 and 739—range between 5.99% to 9.33%.
Even a small amount of money saved from refinancing student loans or other debt can have a significant impact on your retirement savings. For example, saving an extra $100 per month for 30 years can lead to more than $117,000 in retirement savings, assuming a 7% rate of return.
Wringing the savings out of your budget is one thing, knowing where to invest it is another. The main retirement vehicles for millennials are employer-sponsored retirement plans, such as 401(k), and Individual Retirement Accounts (IRAs):
Contribute to your employer's retirement plan if they offer matching contributions.
One in four workers fail to contribute enough to their employers' retirement plans to qualify for full matching contributions, according to an analysis by financial advisory firm Financial Engines. The most common retirement plan contribution among large employers is a dollar-for-dollar match up to 6% of pay. Financial Engines found that the typical employee who doesn't receive the full match misses out on $1,336 each year. For the average employee, that's an extra 2.4 percent in missed annual income. When you consider the compounding investment returns of retirement plan contributions, the loss of missing the employer match can be as much as $42,855 over 20 years.
Consider an IRA.
Not all employers offer an employer match or even have a retirement plan. Individual Retirement Accounts allow you to increase your savings and offer tax advantages without an employer-sponsored retirement plan. IRAs come in two flavors:
A traditional IRA lets you contribute dollars before they are taxed to an investment account so your money can grow without paying income taxes and capital gains taxes on the contributions and earnings. However, withdrawals from traditional IRAs are taxed. And if you take money out of a traditional IRA before age 59 ½, you will likely pay a 10 percent early withdrawal penalty unless you are under financial hardship.
A Roth IRA lets you contribute after-tax dollars to an investment account, contributions grow tax-deferred, and withdrawals are tax and penalty free. Keep in mind both traditional and Roth IRAs have contribution limits and, if you are a high earner, your contributions to a Roth IRA may be restricted based on your income.
Whatever retirement account you pick, the most important retirement decision you can make is to start saving now while time is still on your side.
"The Millennial's Guide to Retirement" seminar is one of many events sponsored by CommonBond. Our events team creates experiences focused on the topics you care about—from career growth to personal finance to social enterprise. Learn more about our lineup of upcoming events.