It’s Never Too Early to Start Saving for Your Future
Millennials are on a career high after graduation. After years of all nighters and endless study groups, they get their diploma, and they’re ready to hit the real world.
But about six months later, the reality of “adulting” hits. The student loan payment grace period ends, and many are crippled with debt and start shoveling money towards hefty monthly payments. Some are forced to live with their parents in a spare bedroom to get by while searching for a job. Yet, they’re expected to start saving for their future shortly following graduation.
If you fall under this description, the word investment might not even be on your radar. But it actually isn’t as intimidating as it sounds. With just a little digging and research, you can begin investing today.
Let’s assume you want to retire at 67 and your current income is $35,000 at 22. You’d have to save about 11% of your income for your entire career to reach a savings goal of $1.5 million as directed by Social Security Administration calculations. Hold off until 30, and it’ll take closer to 20% to reach the same amount. This may seem like a big savings pot, but if you live longer than average or have medical bills early in retirement, it can severely affect your lifestyle after you hang up your work boots.
Here are some tips so you can get ahead of the curve and start investing.
Learn the Ropes
It’s time to hit the books—or the online pages—again. Just like in college, you have to put in a little study time. But don’t worry, learning about investing won’t require any all nighters.
Khan Academy is a great place to get started, and NerdWallet’s guide on how to invest in stocks offers essential information for beginners. If neither of those are up your alley, you can also connect with an online broker who can help you.
Think About Your Retirement
First of all, you can’t rely on Social Security. If it’s still around by your retirement, it might only cover 40% of your previous income, and most models suggest you need 80% to live comfortably. Also, many people actually spend more after retirement, not less. International travel, anyone?
Instead, every investor and broker will tell you to open a retirement savings account early. If your employer offers a 401(k) plan, start there. Through a 401(k) plan, you can deposit a portion of your pretax salary directly from your paycheck. Once you hit retirement, you’ll pay the taxes when you start taking distributions.
With a 401(k) plan, many companies will generously match your contributions up to a certain threshold. You should take advantage of this and match it to the maximum.
If you don’t, you’re literally refusing free money. Let’s go back to that earlier retirement example. If your employer matches up to 6%, that means at 22, you’d only have to contribute 5% and not 11%.
If a 401(k) plan isn’t an option for you, consider opening a Roth IRA. Unlike a 401(k) plan, you can’t contribute your pretax earnings, but it offers something a little more advantageous. You pay the taxes now on your contributions, but in the future, you’ll take the distributions tax free. It’s kind of like doing a favor for your future self.
Take Risks While You’re Young
If you invest early, you’ll have time to take the risks. But we’re not talking gambling a grand in Vegas—we’re talking investing in stocks. The more risks you take, the more potential for reward.
You might see drops in the short term, so if you need money in five to 10 years, you shouldn’t consider investing in stocks. Of course, you could potentially lose out and never collect the premium, but it’s unlikely if start investing when you’re young.
Take a look at a study from Vanguard for examples of how portfolios performed between 1926 and 2015. A portfolio of 100% bonds had an average annual return of 5.4%. On the other hand, a growth-oriented portfolio of 70% stocks and 30% bonds had an average annual return of 9.1%. Bonds are safer, lower-return investments that can help counter the risk of investing in stocks.
Over such a long period of time, the difference between a 9.1% return and a 5.4% return is very significant, more than $1 million. It’s not a practical idea to count on a 9% return, but you can take appropriate risk when younger, and then move to more stable investments later in your career when you would have less time to make up any large drops in the market.
According to BlackRock, millennials have as much as 70% of their money in cash, meaning a checking account, a savings account or a wad hidden under the bed. While it’s great to save money, if you add inflation to the mix, you’re not saving money but actually losing it.
Don’t Be Shy Asking for Help
If this is uncharted territory for you and you’re feeling overwhelmed, make an appointment with an advisor at your financial institution who can walk you through the process step by step and answer all of your questions. None of us are experts the first time, and we all need to start somewhere.