Special to the Financial Independence Hub
Being a millennial is both a gift and a curse: we are the most educated generation yet, but saving for the future is harder than it’s ever been. While there are more workers than ever with a college degree, many industries require a graduate degree to get a job that will help you earn enough money to save for retirement.
The St. Louis Federal Reserve revealed in June 2017 that the personal saving rate is at a dismal 3.8%. This figure peaked on May 1975 at 17%, before settling down to a comfortable 10.5% on August 2017, meaning Baby Boomers had more to look forward to once they called it a day in the workforce.
The 2008 economic recession — the worst one since the Great Depression — has caused millennials to approach investing opportunities with caution, avoiding placing their cash in non-liquid assets. Many young professionals don’t feel comfortable entering the stock market — despite being bullish as of late — or investing in unregulated and volatile cryptocurrencies such as Bitcoin. But there are still sound ways to get the most out of our wages without taking unnecessary risks.
How much do I need to save?
It may not be what you want to hear, but most millennials will have to work for longer than previous generations in order to amass a retirement cushion they you can enjoy through their golden years.
On February 2017, a study conducted by caring.com determined that only four in ten adults have a will; only 36% of the 37-52 year-olds that make up Generation X have a will, while 58% of Baby Boomers (ages 53-71) have one. This means most of you will have to rely on the fruits of your labor instead of someone else’s.
A recent JP Morgan study determined what chunk of your wages you will need to save, based on your income bracket. Those earning a median income will have to save 4% to 9% of their pre-tax earnings if they start saving at age 25 and plan to retire at 67. If you’re part of the affluent category, you will need to save between 9% and 14% pre-tax, while those in the high net worth segment will need to keep 14% to 18% of their monthly dough.
Safe and effective ways to plan for retirement
In the United States, Individual Retirement Accounts (IRAs) and 401(k)s are among the most popular ways to add longevity to your wages for a reason: they work. (Their Canadian equivalents are RRSPs and group RRSPs or Defined Contribution pensions.) Taxes become less of a headache when you open one of these accounts, as your W-2 forms reduce the amount of your earnings subject to federal income tax. For example, if you add $10,000 to your 401(k) and you’re part of the 25% tax bracket, you will save $2,500 in taxes.
Working for the right company is important, too, as many employers will match your contributions as long as you add a specific percentage of your earnings to your 401(k), usually between 3% and 6%.
If you’re willing to live frugally and maximize your earnings further, investing in bonds is a safer alternative to buying stocks that can bolster your portfolio. U.S. Treasury bonds are the smartest bet, offered over a term of 30 years and yielding a fixed interest rate every six months until they mature.
The best-laid plans don’t always go the way they’re supposed to, and we’re all probably going to face a slew of unexpected bills over the course of our lives. Medical bills, higher health care premiums and car issues are all real possibilities that could cut through your retirement plans. An emergency savings account is a smart way to stay afloat during periods of stagnation. Keeping 10% to 20% of earnings in a separate account can serve as a cushion to keep you on track if you find yourself at the doctor’s office or in between jobs.
Finally, seek ways to reduce your student loans and debt by choosing a plan you can handle. Paying off debt in ten years is the way to go if you can do it, but the 30-year option is more feasible for many. The downside of the 30-year plan is the fact that you’ll end up shelling out more money overall due to interest. And speaking of interest, paying your monthly due along with added interest for that period prevents your outstanding debt from slowly ballooning.
The bottom line
Keep tabs on where your money is going at all times. I use a simple Excel spreadsheet to do my budgeting, noting what amount of my earnings is left over after necessary expenses such as rent, food, travel and Internet. By determining where you can cut back and where you can invest, your retirement plans will start taking shape.
Gabby Revel is a freelance writer and editor with over 10 years experience writing about personal finance, beauty and fashion, and other lifestyle topics. When she’s not writing, Gabby likes traveling and exploring the world. And she loves cats.