The Millennial's Guide to Retirement

Millennials today aren’t even thinking about retirement, with over 70% without a retirement fund (according to an Ipsos survey). They face a staggering amount of student debt and don’t think contributing to a retirement account is doable. Many also push retirement into the future, saying “I’ll start contributing when I make more income” or “I’ll take a look when I’m more financially stable”.

Thinking about retirement can be hard, because it feels so far into the future. Sometimes you want to live “in the moment” and “enjoy the best of life”. Of course, you should be living your “best life”, but saving for retirement today also ensures that you don’t need to be stressed with money in the future. Luckily, time is on your side and the earlier you start a retirement plan, the quicker you will build wealth for your future.

Finding Money to Save

Often times, millennials don’t think they have excess cash to contribute towards a retirement account. However, this is a big misconception and it is possible to put aside some cash (no matter what amount) by making sure the first thing you do with your paycheck is to allocate a portion towards retirement. A lot of companies also offer employer matching where an employer will contribute when you contribute to a retirement account. You should definitely take advantage of this benefit, because it’s almost like “free money”. Just make sure that when you do earn more money, you start to contribute more towards retirement.

Growing Your Money

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A lot of people want to wait until they are in a “better position” to start contributing to their retirement. In most cases, this is NOT the right thing to do because of the power of compound interest. What exactly is compound interest? Compounding basically means earning money on money that you have already earned. Both the money you save and the profit you make on the money you save will grow each year. The longer you have your money saved, the faster that money will also grow. For example, if you save $100 and earn a return of 20% annually you will earn $20 the first year. The second year, you will earn $24 (or $4 more) because you are earning 20% on $120 now. This will keep continuing, even though you aren’t contributing any more money in. Why does this mean for you? This means that the earlier you save for retirement (no matter the amount) the more it will grow towards your future.

Breaking It Down

Let’s look at an example with two college roommates Britney and Christina. Britney starts contributing $500 a month into her retirement account at age 23 and contributes for the next 10 years. Christina doesn’t think about contributing until later, and starts contributing $500 a month into her retirement starting at age 35 for the next 30 years. We both assume they have an annual return of 8%. When they are both 65 and catching up on their college days, Britney has contributed $60K total and has a retirement fund of $1.1M while Christina has contributed $180K total and has a retirement fund of $730K. Britney has almost 50% more in her retirement fund than Christina and also saved up only 1/3 of the amount. By starting earlier and even with no future contributions after she was 35, Britney still came out ahead of Christina!

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Where to Invest in Retirement

One big reason many millennials are hesitant to contribute to a retirement account is because of their lack of understanding of where to actually invest their money. You can fund your retirement through either your employer (such as a 401K) or an individual (such as an IRA) account. Many people often take advantage of an employer account because there is employee matching, tax advantages, and it can easily be taken out of your paycheck.

Starting and funding a retirement account is one of the first steps to building wealth for your future!

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