Retirement for millennials seems far away, but because of the changing landscape of retirement income, saving should start now.
What will retirement look like for the millennial generation? This may seem like a loaded question, and full of unknowns, and that’s because it is. We are looking at three to four decades of time passing before the millennial generation embarks on retirement, during which, a lot of change can happen. Changes to Social Security, Medicare, and cost of living are all inevitable, and changes we won’t be able to predict accurately at this time.
For the sake of this piece, we are going to go on what we know today, and the generation that is currently retiring, the Baby Boomers.
The average boomer retiring today can derive their retirement income from four main sources.
The following quote is listed on the Social Security website, “Today’s report shows that, as a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed” (1).
That’s only 18 more years that Social Security will be fully funded, and then it drops significantly. Statistics show the average monthly Social Security check per person is $1294 (2). After 2034, when Social Security will only be three-quarters financed, that average will be closer to $970.
What about those retiring in 2054? Or 2064? While we can only make predictions, one thing is almost certain, Social Security claiming in retirement will be much different for millennials, if it is still an option at all.
Now let’s look at pensions. A pension plan is a type of retirement account that is funded by your employer. Also coming from Social Security's website, the percentage of workers covered by a pension plan that will pay out over retirement has been steadily decreasing over the past 25 years, from 38% in 1980 to 20% in 2008 (3). The reason for this is because more funding has been directed to company 401k’s rather than pension plans. This shares the burden of funding with the employee, rather than just the employer.
Does your employer currently offer a pension? If the answer is no, there's another stream of income you can eliminate from your retirement.
While 401k’s are still common in the workplace, they are less prevalent than they used to be. Growing up with the internet, many more millennials are self-employed, able to generate income from multiple “side hustles” at once, or work for smaller firms. All of these are less likely to provide a 401k, or employee benefits. A study done by the Pew Charitable Trusts shows that 41% of millennials do not have access to a company sponsored 401k. The same study also showed that only 52% of those that do have access are actually making contributions. (4)
The final income stream for retirement comes from personal savings. These are the funds socked away over the years in a savings account, IRA, Roth IRA or other investment accounts. If you don’t want to outlive your money, the general rule of thumb is to withdraw only 4-5% of your investment accounts per year.
So what does all of this mean? If the current retiree has 4 sources which they can withdraw income, it can be assumed that their personal savings will not have to account for as much. That section of income does not have to be as large since there are other streams available. But what if you can’t count on Social Security? Or a pension? Or a 401(k)? Your personal savings are going to have to make up the difference.
Collecting Social Security is not a guarantee for millennials at the time they will be retiring, and employer-sponsored retirement plans are not available to everyone, nor are they even being fully utilized to those that are. This means the burden of retirement income will fall on your personal savings. The best thing you can do for your future self is realize and accept this burden. You will be responsible for providing an income for yourself, and the sooner you begin saving and investing, the easier that will be.
But remember, you will need enough to fund 20-40 years of retirement...without running out of money. To put that into perspective, if you retire with $2 million invested and follow the 4% rule, you will be able to withdraw $80,000 a year. If you have $1 million, you will be able to withdraw $40,000. If you only have $100,000 saved, you will either outlive your savings or have to try and survive on $4,000 per year. If these figures are daunting, please don’t get discouraged, because saving $1,000,000 is probably not as difficult as you think!
Now, you might be inspired to start saving, but how do you do it? The first step is, see if your employer offers a 401k (if you are not already enrolled and contributing), and if they do, START CONTRIBUTING! Many plans also offer an employer match up to a certain percentage, this is FREE MONEY, so try to contribute enough to get the full match.
If you don’t have access to a 401k, you can set up your own IRA (Individual Retirement Account). Anyone over the age 18 and who has earned income can open up an IRA. You can contribute up to $6000 per year (as of 2019), and once you are age 50 and older, the annual contribution limit increases to $7000. You have the option of opening a Traditional IRA or Roth IRA, or both. You can learn more about the Roth IRA here.
If you already contributing to a 401(k) you can still open up an IRA, and max it out annually at $6000, as long as your income is under the IRS contribution or deduction limit.
If you happen to be self-employed, you can still open either a Traditional or Roth IRA, but you also have more options, like a Solo 401k or SEP IRA.
Some Googling will give you more information on various “wheres” and “hows” if you prefer to do it on your own, or you can set up an appointment with a local financial advisor. An advisor will go over the account details, get your account opened and help create a savings plan that you will be able to maintain. They will also help decide your investment strategy, and allocate the money you are contributing accordingly.
If you are just beginning on your savings journey, see if your parents have a financial advisor and if you can start an IRA there (often they will group family accounts, and if it’s alright with your parents, they may just bundle the management fee in with theirs), or find an advisor that specializes in helping young people take this important step.
If you have any questions or are inspired to open your account today, I would love to help! I can be reached at email@example.com