Retirement Tips for Millennials

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Millennial Retirement Planning | It is Never Too Early to Prepare

While retirement may seem like a far off dream, it is never too early for millennial retirement planning. It can take decades to prepare for your retirement, and the longer you put it off, the harder it can be to pull together the savings you will need. The money you set aside for retirement undergoes compound growth over time; so, the earlier you save, the more money you will have to work with when the time comes to retire.  

Most millennials (53% according to Market Watch) expect their retirement savings to be their primary source of income once they retire, yet the median millennial has $23,000 in retirement savings and invests just 10% of their salary in a 401(k) or other retirement account. At this rate, the average millennial is not even close to investing enough to maintain their standard of living once they retire. 

millennial retirement planning path

While this can be a scary truth to confront, there is still time to set yourself on the right path toward ample retirement savings. Here are a few tips to help you get started:

Determine Your Saving Goals for Millennial Retirement Planning

millennial retirement planning savings 1

When people come to us about retirement, the first question they ask is, “How much do I need to save?” The answer is dependent upon several factors and, therefore, varies greatly from person to person. Use our retirement calculator to get a quick estimate of your savings needs, or calculate it yourself using the following:

  • Life expectancy
  • Length of retirement
  • Annual retirement spending 
  • Retirement savings/benefits

The first step in determining your savings goal is to estimate how much you will spend throughout your retirement. This, of course, depends on how long you will live. 

Step One: Estimate Your Life Expectancy

While none of us know, or likely want to know, how long we will live, we can figure out a rough estimate by assessing the average life expectancy. The average person in the U.S. lives to be 78.6, although more than 30% of 65-year-olds will live past 90. 

Once you have done a little bit of research and landed on a life expectancy you are comfortable with, subtract your planned age of retirement from that number. This will give you an estimated length of retirement. For example:

Estimated life expectancy - planned retirement age = length of retirement 
92 - 67 = 25 years of retirement

Step Two: Calculate Your Annual Retirement Spending

From here, calculate your annual retirement spending. This is a sum of all the costs you will incur throughout your retirement years, including housing, utilities, food, etc. Some of these costs might line up with your current expenses. But others, like childcare and healthcare, will likely change. Try your best to visualize the retirement lifestyle you would like to lead, and then budget accordingly. In doing so, keep these primary categories in mind:

  • Housing
  • Transportation
  • Healthcare
  • Food
  • Personal insurance
  • Cash contributions
  • Entertainment

Once you have set your annual spend, multiply it by the length of retirement we calculated above to determine your total retirement expenses. For the sake of this example, let’s use the current average annual retirement spend, which is $45,756 according to the Bureau of Labor Statistics.

millennial retirement planning calculator
Length of retirement x annual retirement spend = Total retirement expenses 
25 x $45,756 = $1,143,900
millennial retirement planning chart

Now, you have an idea of how much you will spend throughout your retirement, but is this the same as the total amount you will need to save? Not exactly.

You will need to account for inflation, at a rate of about 3% per year. We recommend using this tool to do so. Using the numbers and assumptions we have already made throughout this example, along with an age of 30, a current annual income of $51,272 and a conservative pre- and post-retirement investment return of 6%, we can calculate a total of $1,959,733 needed for retirement.

Step Three: Add in Your Retirement Benefits

But, we are not quite done, yet. We still need to factor in your expected retirement benefits. This includes your 401(k) and Social Security benefits. These vary greatly from person to person, but there are several tools out there you can use to estimate your 401(k) and Social Security payouts. 

It is important to remember that you only get your entire Social Security benefit check if you wait until your full retirement age (FRA) to claim your benefits. This age is 66 or 67, depending on the year you were born. Claim early for any reason and you get less each month (about 70 or 75% of your full benefits) to make up for the additional months you will be receiving benefits.

The same holds true if you delay your benefits. Wait until you are 70 to claim Social Security and your monthly payments will be higher. This is definitely the way to go if you plan on being part of the 30% of 65-year-olds that live past 90.

millennial retirement planning chart

Once you have estimated your expected benefits, subtract that number from your total retirement needs. This will give you your total retirement savings goal.

Total retirement needs (expenses plus inflation) - expected retirement benefits 
= total retirement savings goal

From here, our team is happy to show you how you can break this number down into a monthly savings plan to start your millennial retirement planning off on the right track.

Start Contributing!

Once you have calculated a savings plan, it is time to put this plan into action. If you do not already have a retirement account, open one. Many employers will offer a 401(k). If this is not an option for you, you can also open an Individual Retirement Account (IRA). Some people even choose to do both. It can be helpful to consult with a financial advisor to determine what kind of account is best for you. Let’s do a quick comparison of the two below:

401(k)
  • Set up by an employer
  • $19,000 maximum annual contribution ($25,000 for those 50+)
  • Employer may match some of employee’s contributions
IRA
  • Set up by an individual
  • $6,000 maximum annual contribution ($7,000 for those 50+)
  • Often charge lower fees than 401(k)s
  • Wider range of investment choices than 401(k)s
millennial retirement planning benefits

If you go the IRA route, there are two different types of accounts to choose from. Traditional IRAs are tax-deferred, meaning you pay taxes on your distributions during retirement and cut back on your taxable income now. Roth IRAs are taxable now but grow tax-free into your retirement years. Most 401(k)s offered by employers are tax-deferred.

If you think you are in a higher income bracket now than you will be during your retirement, tax-deferred IRAs are the way to go. If the opposite is true, Roth IRAs are your friend.

Whatever route you choose, try to meet your contribution goal each month. While this is the best case scenario, we understand that this is not always achievable. If this is the case, contribute as much as you can and try to increase your contribution by 1% or so a year until you reach your goal. If your employer offers a 401(k) match, contribute at least enough to get the full match amount.

Know the Costs of Your Account

Whether they are 401(k), Roth or Traditional IRAs, all retirement accounts have fees. They are taken directly out of your account, so you may not notice them, but they are always there.

To make sure these fees do not cut into your profits down the road, you want to ensure you are paying no more than 1% of your assets in annual fees. These can include general administrative fees or individual investment/transaction fees. As a general rule of thumb, 401(k)s have higher fees than IRAs.

These are all important things to keep in mind as you are assessing your fees. If you find yourself paying more than 1%, look into other lower-cost investments. A financial professional, like our team at Tranel, can be a great resource to help you find cost-effective alternatives. 

millennial retirement planning fee

In Closing - Millennial Retirement Planning is Important!

These are the most basic steps you should take to prepare for your retirement. But, remember, your retirement plan is ever-changing, especially if you are a millennial with decades until you retire. A “save it and forget it” approach to retirement is never recommended, even if you are meeting your defined savings goals each and every month.

Instead, ongoing monitoring of your account(s) is key to maximizing your earnings when the time comes to retire. You should stay on top of your fees, monitor any changes or updates to Social Security and assess your investments every now and then to ensure they are working for you, not against you.

If this seems like a lot to keep track of, that's okay. Our team at Tranel is here to guide you every step of the way. We’ve been helping our clients prepare for their financial futures since 1988. With more than 30 years of experience, we have the know-how to help send you into retirement with confidence. Learn more about our retirement planning services today, or contact us for a consultation.