Retirement has long been the cornerstone of any working-class person. It’s a great concept: spend 45 years in the workforce, then around the age of 65 (or earlier!) you’ve earned the right to sit back and enjoy the fruits of your labor.
This involves saving for retirement. No one is going to hand you bags of cash just because you’re now a senior citizen. The days of a defined benefit pension are nearly over. Those are your parent’s pensions – it’s the type of pension where they still have a steady pension income every month regardless of savings.
If your company offers any pension contributions now, chances are it’s in the form of a 401(k). This puts retirement saving squarely on your shoulders to manage and maintain. Sure they’ll contribute some, but you have to do most of the heavy lifting.
The other major problem millennials will face is the amount of money they’ll need to retire. This poses an important question, how millennials can save for retirement so that their corpus is big enough?
“Old Millennials, who are born in the early 1980s, will need approximately $1.8 million to maintain their standard of living in retirement. Younger Millennials, who are born in the late 1990s, will need approximately $2.5 million. This has been estimated according to various studies, estimates and experts.”
Don’t let that number scare you too much. It includes inflation. Chances are your salary will steadily increase throughout the years – and so should your pension plan contributions. New grads today who aren’t smart about investing may not be able to retire until they turn 75.
Here are 5 ways millennials can save for their retirement.
Don’t Wait to Start Investing
Start saving today. It doesn’t matter how old (or young) you are, there’s no better time than right now. Take this example: the difference between starting saving $200 a month at age 25 vs. age 35 can be the difference between having $200,000 or $400,000 in retirement.
Even if you’re 35 years old, don’t wait! If you hold off saving, by the time you turn 45 that same $200 a month will only have earned you just over $90k. Save early and save often.
This is the magic of compound interest. Each dollar you invest today will earn interest every single day it’s in there. Plus, the interest you earn will now earn interest! Then THAT interest will earn interest. It’s magical. The sooner you can get your money working for you, the better off you’ll be in retirement.
Be Aggressive
If you’re young, you’ll want to be aggressive. Taking on a high-risk portfolio will enable you to have higher returns over the long run. Sure you could plug your money into a GIC (a guaranteed income certificate) so you never lose a cent, but you’ll usually earn significantly less than 3% interest.
By investing in a slightly more aggressive portfolio of index funds or mutual funds, you can earn 8% or more in the long run. It may mean your investments don’t earn money some years – or even lose money – but if you plan to hold the funds for a long period of 20 years or more, you’ll see larger gains.
Using index funds is a great way to keep your fees lower and put more money into retirement savings.
Buy Property
Property is one of the most secure investments you can have over the long term. Even in the worst-case scenario, property usually at least keeps up with inflation. If you’re going to be paying rent anyway, why not do it in a way that builds an asset.
For example, if you currently spend $1000 a month in rent, you can spend the same on a home, except after 25 years you’ll have a $250,000 asset. That’s oversimplifying it, but the basic concept is there.
Even better, if you can muster enough money for a rental property, you can get someone else to cover your mortgage payments and have THEM build a $250,000 asset for you! This, of course, takes a little bit of work, and various regions have their own rules about landlords, but it’s a great way to build equity.
Watch Your Spending
Cutting your expenses is the same as making more money. For example, if you can cut your expenses by just $100 a month, that’s $1200 a year in after-tax income – or the equivalent of giving yourself a $1500 a year raise in before-tax income.
If you can cut your expenses, you can put that money right into savings. If you cut out dinner and drinks once a week, at a very modest cost of $30 a night, you can easily save $120 a month! If you’re 25 years old, that amount of savings will equal about a quarter of a million dollars in retirement savings!
You don’t have to live like a hermit, but look at what you can cut out, what you can do at home for less, and you may find yourself in a much better position come retirement.
Have a Plan, Stick to the Plan
Once you make a plan, you need to stick to it. It’s best to write out your goals and how you’re going to achieve them. You don’t need to be a world-class writer, there are plenty of top websites that can handle that. You just need to make sure you clearly lay out the plan and results.
Young people will experience many changes from ages 20 to 30 to 40. As priorities change, you need to ensure that your saving goals are not pushed out of the way in favor of other changes in lifestyle.
As you age and get closer to retirement, you’ll want to move your riskier investing into safer plans. This should be part of the plan. You should also save a little for emergencies. Most experts recommend 3 months of pay. This will help prevent you from dipping into retirement should any unexpected expenses arise.
As a millennial, you may not have the advantages your parents had with defined pension plans. However, with a bit of planning and some smart savings, you can be just as well off in retirement.
