By Kali Hawlk
It would be safe to say that metaphorically, Generation Y stumbled out of the gate. We carry a huge student loan debt burden and we graduated into a down economy with a weak job market. Wages and starting salaries stagnated while the cost of living has only continued to rise.
As a result of a dubious start, there’s been some concern as to whether or not Gen Y will be able to retire on time—or if we’ll be able to retire at all.
Here’s the good news: Gen Y can build up the nest eggs we’ll need to retire when we’re ready to do so. The catch? We need to take these three steps right now:
1. Start Saving and Investing Now
It’s never too early to start investing. Time is the most important factor when it comes to building wealth. It’s so crucial that if you start earlier, you can invest less and still end up with a larger sum than someone else who wanted ten years to start investing but invested more when they finally got going.
Here’s an example I used in a piece on why Millennials and members of Generation Y need to start investing now, even if they don’t feel like they 100% understand why it’s important to do so:
[Say you're 23 years old and you] invested $1000 into a Target Fund Roth IRA at the beginning of this year. You contribute $100 to your Roth every month – and you continue to do so, without fail, for the next 40 years until you’re 63 and retired.
At the end of that period, assuming a return of 8%, you would have nearly $333,000. Just for contributing $100 per month! Imagine how much more you’d have if you contributed $500 or more per month. (For the record, it’d be a whopping $1,576,000.)
Now let’s assume you waited to contribute to that Roth IRA. [You finally feel like it's time to get on with this investing thing when you're 40]. You start with $2000 in your Roth IRA and contribute $500 per month.
You still want to retire at 60, which means you only have 20 years to contribute, and guess what? At the end of that shortened time period, assuming the same 8% return, you’d only have about $283,900 – less than what you would have had if you started earlier even though you contributed far less every month.
That’s the power of compound interest! Your wealth grows on an exponential curve. When you invest, each of those dollars in your retirement fund is working for you to earn even more dollars.
Another great example of compounding comes from Budgets are Sexy. Writer J. Money broke down Barbara Friedberg’s post that stated if you doubled a penny every day for a month, you’d end up with 10 million dollars.
If you wait to invest, you’re missing out on a huge opportunity. Want to retire, and on your own terms? Save and invest starting right now.
2. Take Advantage of Free Money and Tax Breaks
You can maximize what you can save by putting your investments into the right places.
Start with your employer-sponsored retirement account if one is available to you (if you’re self-employed, consider a SEP IRA). You need to contribute up to the match that your employer offers—this is free money! If your company will match your contributions up to 3%, you need to put in 3%. It’s like doubling what you’re saving for retirement.
If you want to save and invest more but feel like you don’t have enough left after taxes, open a traditional IRA. The money you contribute to this account is tax-deferred, meaning you don’t pay taxes on it in the year you earned it. You will need to pay taxes when the money is withdrawn.
Getting that tax break now may help you save more for later.
3. Invest More than “The Experts” Tell You To
One of the most popular questions anyone asks about retirement goes something along the lines of, “How much do I need to retire?” It’s a complicated question simply because the answer depends on countless factors.
What will your expenses look like? What do you want to do in retirement? How much are you planning on spending each year beyond your basic needs? How many sources of income will you have? Will you be able to actively bring in money each month via a monetized hobby or part-time work?
Your personal answers to these questions will determine what your personal retirement nest egg goal should look like. But of course, the answers are hard to nail down when your retirement is 20, 30, or 40 years away.
If you turn to Google and search for the answer, you’ll likely come up with one of these solutions:
- You need to save 15% of your income to be able to retire in your sixties (assuming your expenses will drop by 20% from what they are currently)
- You need to have 8x your ending salary in the bank when you retire
- You need $1-$2 million dollars for retirement
This really doesn’t shed a clear light on the picture, and only the first one on that list really gives you an idea of what you need to do today in order to retire tomorrow.
The problem is most experts suggest saving only about 15% of your income. The reality is that many of us are capable of saving far more than that, but since the norm is to save 15%, once we hit that threshold we assume we get a free pass to spend the rest on whatever we want.
Want to ensure a happy retirement, and one that could start decades earlier than the year you turn 62 or 63? Save and invest a bigger percentage of your income. Aim for 20% or 30%—or more, if you can.
If you want to make things really simple, check out this handy chart from Mr. Money Mustache. It illustrates the amount of working years you must complete before you reach financial independence, based on your current savings rate.
Only saving 15%? Expect to have to continue working for 43 more years until you even have the option of retiring. Save 30%, however, and you won’t have to worry about a paycheck ever again in 28 years. If you can make it to a 50% savings rate, you’re only 17 years away from being able to live without being required to generate a certain income from a certain job.
Retirement is possible for Gen Y. The earlier you start saving, the more wealth you can acquire. Not to mention, the more you save the faster you’ll be free to pursue jobs, hobbies, or experiences that interest you without being tied down by obligations to an employer or the need to earn more to cover your expenses.