As a financial adviser and Millennial, I often read articles highlighting the lack of retirement savings by people my age. Sometimes referred to as the “most-educated generation in American history,” our skillset, confidence and team-minded nature are impressive. But the statistics around Millennials’ lack of savings can be downright shocking.
In fact, according to a report from the National Institute on Retirement Security, about 66% of people between ages of 21 and 32 having nothing saved for retirement. I commonly hear the same frustrations from Millennial clients who are trying to save for retirement. Their savings plan coincides with paying off student debt, saving to buy a home or planning a wedding — all in a tough job market upon graduating.
Millennials are typically defined as the generation born from the early ’80s to the mid-to-late ’90s. We now represent the largest generation in the U.S. labor force.
However, unlike previous generations, most Millennials will not have access to a pension plan. Therefore, a larger load of retirement savings falls on their shoulders. The Pew Charitable Trusts estimates that only 10% of workers now have a defined benefit plan, such as a pension. The most common employer-sponsored plan for our workforce has become the 401(k).
If you’re a Millennial, the good news is time is on your side.
With pension plans being replaced by 401(k)s and Individual Retirement Accounts (IRAs), it’s imperative you understand the complexities of these plans. Most Millennials I sit down with tell me their reluctance to invest in a defined contribution plan stems from the fact that they never had any financial training on the matter.
While Millennials may be off to a slower start in retirement savings compared with previous generations, there is plenty of time to catch up. When working with Millennial clients, I often have them follow a few simple steps to start setting a strong financial foundation.
First, create a budget and statement of financial condition. A budget can help keep track of where your money is going and what spending activities you may need to limit in order to reach your goals. Trust me when I say there are areas of spending you should reduce. We’ve all got them, and they add up.
Creating a budget is a critical part of establishing a solid financial plan. The crux of a good budget is discipline and accurate tracking. Without discipline and accurate tracking, a budget won’t be of much help.
Next, create an emergency fund. I call this the “safety net.” For it’s not if life happens, it’s when life happens. Far too often I see Millennials without an adequate emergency fund to safeguard against life’s unexpected events. In fact, a recent survey from the Federal Reserve noted that 40% of adults couldn’t cover a $400 emergency.
Without an emergency fund, people often resort to credit cards to pay for emergencies, which often compounds the problem. A good rule of thumb I suggest to clients is to keep the equivalent of six months of fixed and variable expenses in liquid accounts for emergencies.
Finally, look to take advantage of retirement accounts early. With a solid budget and emergency fund intact, Millennials should turn their focus to available retirement accounts. Retirement accounts such as 401(k)s and IRAs are powerful tools to grow long-term wealth.
As noted earlier, 401(k)s and IRAs have all but replaced the dying pension plan. However, a lack of financial literacy and understanding of retirement plans have become deterrents for savings among Millennials. Not to mention, the investments inside of retirement plans can be downright daunting. I encourage folks to take advantage of a free consultation with a financial adviser to review their particular plan.
Something I often see overlooked and misunderstood is the company match within 401(k) plans. Investing in a retirement plan with a company match is a no-brainer.
Again, I know Millennials have other immediate things to worry about, like reducing debt and saving for those big life moments. But laying the groundwork for retirement sooner rather than later can ensure you retire earlier and with more money to enjoy during the “golden years.”
Editor’s note: Titus Laney is a client adviser for Arvest Wealth Management in Benton County. The opinions expressed are those of the author.