Most of the older generation is of the mindset that millennials don’t know how to save for retirement (or even care), but that’s not 100% true. Gen Y is actually thinking about retirement planning rather early in life:
- For adults under the age of 30, the biggest retirement fear is that they will run out of money by the time they retire, and many plan to continue working.
- More than 80% of millennials believe they cannot rely on Social Security to keep them comfortable in retirement.
- Most believe their retirement will be self-funded, and over 70% started saving for it at an average age of 22.
- Millennials are also using modern tools to their advantage, such as mobile apps that help them manage their retirement savings.
However, there’s a flip side as well. For instance, over 60% of millennials believe they need expert guidance, yet only one in three actually consult a professional financial advisor. Over 50% have not calculated how much they will need for retirement, relying on “guesswork” to reach an estimated figure.
Retirement Planning Obstacles for Millennials
Here are some of the main obstacles that millennials face while planning for retirement:
- No Savings in IRAs – Individual Retirement Accounts (especially Roth IRAs) offer some heavy-duty tax breaks, but most millennials haven’t started using these accounts to their advantage. 401(k) accounts allow millennials to gain from matching employer contributions, but they also need to park some savings in a Roth IRA for tax-free withdrawals in retirement.
- Student Loans and Debt – The use of student loans is widespread, especially among the younger generation. When you’re making plans to pay off debt and save for retirement, the process can be rather challenging. For those still paying for their college education, it’s crucial to work with a financial advisor who can help formulate a repayment plan as well as build assets for the future.
- Job and Income Instability – The recession left behind a host of problems, creating an unstable economy with a tough labor market. Unless they were lucky enough to graduate in a high-paying field, most students take whatever work they can get. With lack of stability and low earnings, retirement savings get pushed aside by simple survival and the struggle to meet basic expenses.
- Higher Lifestyle Expenses – Students fresh out of college earn less than their older counterparts for at least the first 10-15 years, if they’re lucky enough to find employment at all. At the same time, inflation has been on the rise. This creates a vicious circle for millennials, since it’s hard to put aside funds for tomorrow while struggling to keep a roof over your head today!
- Lack of Emergency Savings – Even millennials who understand and work toward retirement planning neglect to create an emergency fund. Wonder why “saving for a rainy day” matters when you’ve already saved in a retirement fund? It’s all about protecting those savings from early withdrawal penalties, and avoid running up debt for unexpected expenses.
- Ineffective or No Budgeting – Millennials are accused of being too focused on the latest gadgets, gizmos and personal items, which is often true. It may seem like a good idea to splurge on something because “YOLO”, but it’s also critical to factor in the long-term impact of any expense on future financial security. A well-planned budget is the only answer.
Millennials and Retirement Planning: The Bottom Line
Most millennials are hoping to retire early (by age 65 or earlier), so they have more time and energy to enjoy the things they’d like to do when there’s no more work pressure. However, without a proper financial strategy, it’s going to be hard for young investors to meet their goals.
Contributing to a company 401(k) and an IRA is a good start, but it’s equally important to consult a financial advisor and work on a smart savings plan for retirement!
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments.
Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as MoneyForLunch, Biggerpocket, SocialMediaToday, WealthManagement, SeekingAplha, and NuWireInvestor.