Millennials: Live in the Moment but Plan for Retirement
Millennials are into experiences rather than ownership. Many futurists talk about how we live in a “post-ownership society,” where people would rather rent than own a house, use Uber and Zipcar instead of own a car, and use Spotify to stream music rather than own a CD from their favorite artist.
But even people who live for today’s experiences should be planning for their financial future. Sometimes, I think people spend more time planning a vacation than they do their retirement. Retirement is literally a 35-year-long vacation. It is the ultimate experience of a lifetime, and it is worth the time to invest in it now, while you are young, so you can set yourself up for the kind of experience you want later.
So, what are some of the ways that millennials, like me, can get their finances under control and their retirement planning on track? Here are a few ideas:
1. Pay yourself first. People say they will save “what is left over at the end of the month,” but there is never really anything left. If you are serious about building up your savings, make saving the top priority in your budget. Before you spend a dollar of your paycheck, put your targeted savings amount into your savings account right off the top. If you have direct deposit, split your paycheck so that that money goes directly into your savings account before you even see it.
As for how much to save, the general rule of thumb is to save a minimum of 15 to 20 percent of your gross salary. Most people don’t start off at that level, but it is important to start saving at any level. If you can’t yet afford to save 20 percent, then you can strive to get there.
Up your saving target as your income grows. I had one client who was making $50,000 a year and had a savings strategy to save $1,000 a month, which is well above 20 percent. The client received a raise to $75,000 a year, and, guess what; they wanted to continue saving $1,000 a month. I pointed out that this was a golden opportunity. They were living a lifestyle at $50,000 a year, and, if they held their expenses at the same level, even if they wanted to splurge a little bit here or there, they would be able to save a lot more than $1,000 a month. People don’t think of saving first, but it’s a powerful mindset once you have the habit.
2. Have a savings strategy. You want to have a savings strategy for short-term, intermediate, and long-term goals. Most millennials save in their 401(k), but retirement is a long-term savings goal. If that’s the only thing you’re saving in, then when you need money for your short-term or intermediate opportunities, you won’t have easy access to it. Taking money out of your 401(k) before the age of 59 ½ can incur a stiff penalty. After taxes and penalty costs, you could potentially lose almost half of your investment. You need a strategy for how much to save, and where to save it, for your short-term, intermediate and long-term goals.
3. Set a budget. It is essential to have a clear understanding of what money is coming in — your income — and what’s going out — your expenses. The difference between the two — what is left over — determines your discretionary income. If you are not keeping a budget, you may be surprised at how much money you are spending each month on “little things” like lunch and coffee. Having a budget helps keep the little things from preventing you from reaching your long-term goals.
4. Don’t put all your savings into your student loans and 401(k). My manager told me his biggest regret from his first years after graduating from college was that all his money went either to paying student loans or into his 401(k). He was living at home, so he had no other major expenses. A year later, he looked into his bank account and realized that he had nothing to his name. Sure, his students debts were lower, but not significantly so, and his 401(k) was off to a nice start, but he couldn’t touch the money in his 401(k) until he was 59 ½. He didn’t have the money he needed to get the rest of his life started – buying a car, getting an apartment, planning a vacation, etc.
5. Don’t overpay your student loans. Crushing student loan debt has become the defining characteristic of our generation. Even so, millennials sometimes make the mistake of overpaying on their student loan debt, looking to pay it down quickly or thinking that they have to pay off their loans before they can begin working on their other financial plans. Avoid getting emotional about your debt.
Federal student loan debt can be considered “good debt.” That is, it’s an investment in yourself that will ultimately help build your net worth. It also tends to have relatively low interest rates, so before you put extra money into paying off your student loans on an accelerated basis, think of whether you might be better off putting that money to work elsewhere, such as an investment account or paying off credit card debt.
I challenge you to take a careful look at your budget. You may find there are ways you can redirect money to fund your future plans without having a significant impact on your current standard of living. Life truly is a journey, and our experiences are a gift to be treasured. A little planning now can make our retirement years that much more enjoyable.