Millennials, often defined as those who were born between 1982 and 1995, are young, but they aren’t too young to ignore retirement planning. You are only young once, and having the ability to save often and early allows compounding to work on your side.
Millennials are challenged by competing priorities of paying down student loans and credit card debt while trying to save for short-term objectives like vacations, mid-term objectives such as buying their first home, and planning for retirement. So as a Millennial, what can you do?
Save Early and Save Often
Although it can be easy to live in the here and now and put off planning until a later date, if you don’t save now, you will have to save more later in your career. This is because you need to make up for lost time that your money could have been invested and thereby taking advantage of the effects of compounding returns.
Although putting off savings until later may sound like an okay plan because of the assumption of income growth in our later careers, it may not work to your advantage. Competing priorities may change but will likely still be present. In our later working years, you may have a mortgage and children to educate, further delaying saving for yourself.
The Cost of Waiting Can Be Great
Use the Rule of 72, which says to take your assumed interest rate, divide it into 72 and that is the amount of time it takes your money to double. So if you started saving at age 25 and maximized contributions to your 401k Plan by saving $18,000 a year in 2015 you would have $180,000 by age 35 (not including any investment returns). If you assume a rate of return of 6%, it would take 12 years for your money to double. So by age 47 you have $360,000, by age 59 you have $720,000 and by age 71 you have $1,440,000. Now if you delay savings and that compounding doesn’t start until age 45 for instance, there is a lot of lost dollars in savings you need to make up for in your later working years.
When it comes to investing, it can be intimidating to make decisions. Millennials were just starting to reach age 18 in 2000, at the end of a period of relatively steady economic growth. Then from 2000-2002 the S&P 500 Index went from 1550 to 770, rebounding by October 2007 to 1570. From October 2007 to March 2009, the index fell further to 670 before recovering to 1515 in February 2013. Needless to say, the investment experience of Baby Boomers, who benefited from investing in their 401k plans during a period of relatively stable growth, the experience for millennials has been different.
Although you have already experienced periods of volatility as a Millennial investor, you will benefit from remaining invested through periods of volatility, rather than waiting to try and chase returns. Consistent savings and staying invested in your strategy during periods of volatility is a solid long-term investment strategy.
Educate yourself on investments, and choose a strategy you can stick to through the long-term. Leverage financial professionals that may be helping to manage your 401k plan at work.
Even if you start small, if you start young you are ahead of the game when it comes to retirement savings.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It is an unmanaged index which cannot be invested into directly.