Many of my clients are older folks – people who have been in the workforce for a while and are thinking long-term about what will happen when they pivot from the accumulation phase of their financial lifecycle to the distribution phase. That’s why I was so delighted to meet a cool young man recently. I’ll call him Trey. He’s not my client yet, but I hope he will be someday soon.
Trey is in his mid-20s. Like a lot of people his age – you know, the Millennial generation – Trey has a very different relationship to the working world than his parents or previous generations had. With a strong entrepreneurial streak and the stinging memory still fresh in his mind of his parents’ financial problems in the wake of 2008, he’s going his own way – setting out his shingle for his digital marketing business.
It’s a lot of work. Between finding new clients, paying rent, paying student loans and other expenses, Trey hasn’t been able to save a single dime for retirement yet. Trey’s not alone there. Millennials like Trey have come into the job market at a time when wages have been stagnant or worse, earning 20% less than their parents did at the same stage of life. Millennials’ net worth is lower. Their home ownership rate is lower and their student loan debt is much higher.
In fact, sixty-six percent of working Millennials have not saved anything for retirement, according to a recent report from the National Institute on Retirement Security. Although many have jobs that offer employer-sponsored retirement savings programs, often times, they aren’t eligible to take advantage of them because of their part-time status, according to the report.
There’s been some ridiculous stuff written about Millennials’ spending habits, like the suggestion that home ownership is down among this age group as a result of expenses like avocado toast and Starbucks coffee drinks. It isn’t true. Sure, lots of people have expenses today that we didn’t have 30 years ago – cell phone bills, bigger cable and high-speed Internet bills and so on. But the truth is that many Millennials – people who are now in their 20s and 30s – are struggling just to make ends meet, often because they are earning less, they are starting out the gate with more student loan debt and they don’t have the same employment opportunities.
Things sure have changed since Boomers were in their 20s and 30s.
That’s not to say that Millennials are helpless, or that things are hopeless. But with higher expenses and fewer eligible for employer-sponsored retirement plans, the burden of responsibility to save has shifted more into young people’s hands than previous generations. But rest assured, the tools are available to anyone to save for retirement. Among other things, Traditional IRAs and Roth IRAs are two options.
As I explained to Trey, the bottom line is that the longer you can save, the better off you’ll be.
If Trey, who’s 25, opens a Roth IRA and contributes to it (up to the maximum annual allowable contribution of $5,500) until he’s 65, he will have invested almost $220,000. At 7% interest, Trey can expect to see a balance of approximately $1.2 million, earning nearly $990,000 in interest.
If Trey waits until he’s 35 to start saving, he’ll have about $560,000 instead. Not bad, but you can see that additional compounding over those ten years makes a big difference. Assuming the same annualized return, with no withdrawals, for every ten years Trey delays contributing to a tax-deferred savings account, he will need to save twice as much to see the same results.
A single Roth IRA is not a complete retirement savings plan, but as you can see, smart investing and long-term patience can drastically improve a young investor’s financial future.
No wonder that billionaire Warren Buffett attributes some of his success to compound interest!
As a self-employed individual, Trey’s on his own to figure some of this out. But if you are lucky enough to be working for an employer that offers a retirement savings plan that you’re eligible for and they provide matching contributions, you’re crazy not to take advantage of it. That’s free money on the table that can help you get to your retirement goals faster.
I did stress to Trey that it’s important to forgo unnecessary or frivolous expenses, because they add up over time. But that doesn’t mean he can never take a vacation or buy something nice, so long as he understands how quickly those expenses can add up.
Case in point: A friend of mine looked at his cable bill recently – he was spending $270 a month for a package that included the Internet, phone (which he didn’t use) and a bunch of premium channels. After some negotiation – jettisoning the premium channels and a bunch of other stuff he didn’t need (thanks to Netflix) – he was able to get his bill down to $140 a month. That’s more than $1,500 a year that he’ll be able to put towards retirement or to reduce debt elsewhere.
As I mentioned before, Trey has student loan debt. He is not alone. Student loan debt is a massive burden for Millennials. It has doubled since 2009 to more than $1.4 trillion. I suggested to Trey that he talk to a bank or lending institution about restructuring his student loan debt to help reduce his monthly payments and his interest rate. And if he can lower that monthly payment, I encouraged him not to spend it – rather, to reinvest it in his future by sinking it into retirement savings.
Having an emergency savings plan is essential, too. Trey’s long-term retirement plans will fail if he needs to take a nonqualified distribution from a retirement savings account to help pay for unexpected expenses. Too often I’ve seen people set themselves back years by having to dip into retirement savings early to help pay expenses – and then get hit with a crushing 10% penalty from the IRS, just to add insult to injury.
I also suggested to Trey that as his business takes off and he sees his income rise, he should try to keep his expense level even. Rather than spending that new income, he should use it either to pay down credit card or student loan debt or to increase his retirement savings.
Trey’s well on his way to creating a robust business for himself that will challenge and excite him for years, and with any luck, some of my suggestions will help him prepare for the time when he’s ready to put on the brakes and enjoy the life that he will have worked hard to enjoy.
Whether you’re striking out on your own or you’re working for an employer, you can use these same tips to help make your retirement years worry-free.
Just remember what I always stay: Be vigilant and stay alert, because you deserve more!