Nearly 40 percent of millennials have no retirement savings, according to Personal Capital’s 2018 Retirement Readiness Survey. But millennials willing to take the long view can be reassured that time is on their side largely due to the remarkable power of compound interest.
If you put $10,000 into an investment at age 25 that earned 6% annually and reinvested your returns allowing them to compound, did you know that your investment would grow to more than $100,000 by the time you were 65 years old?
Of course, investment returns fluctuate over time and typical historical rates of return are never guaranteed. But if you force yourself to think and plan ahead, you put yourself in the best position possible to be retirement ready. And the earlier you start, the better.
Here are three important questions to ask yourself, to gain monetary momentum.
What can I do to save more now?
Small adjustments to your spending can translate into significant benefits down the line. For example, try switching from a pricy cable package to Netflix and you could save close to $100 per month. Or cut back on oversized restaurant portions and cook at home a couple more days a week. You just might lose a few pounds and feel healthier while growing your 401(k). You don’t have to do anything drastic to increase your savings. Consistency over time is the key.
Am I maxing out my match?
Many financial advisors suggest trying to save 15%-20% of your income, including your company match. Read the fine print on your employer’s matching 401(k) contributions, or better yet, make an appointment with your advisor who can break it down for you. Companies who match can use very different formulas based on your contributions. Some will match dollar for dollar up to a certain percent, while others might offer higher percentages based on the level of your contribution. Get retirement ready and don’t leave any money on the table. A company match is the only guaranteed return on your investment out there, so don’t waste it.
While I prepare for the long term, how should I prepare for the short term?
If you don’t have one yet, work on establishing a three-month or $10,000 emergency fund for unforeseen events such as a medical emergency, job loss or other financial catastrophe. The last thing you want to do is be forced to raid your 401(k), especially when the market is down, and potentially face early withdrawal penalties on top of it. If you’re not sure where to start, begin by charting your monthly expenses and income, setting your emergency savings goal and making a plan to reach it.
The major takeaway for millennials is to have a long-term outlook. Because of your age, you have a great advantage in getting retirement ready. If you feel discouraged by your current income level — don’t. When it comes to investing, time is really the most valuable asset you have. And you have a lot of it!
References:
https://www.prnewswire.com/news-releases/will-social-security-save-retir...
https://personal.vanguard.com/us/insights/guide/power-of-compounding
Perhaps you’ve lost a job, faced an illness or have been delt a family crisis that emptied out your emergency fund. What are your next steps?
You’re eyeing center-hall colonials in your neighborhood and dreaming about the garden you want to plant in the backyard and all the holiday celebrations you’ll host. You’ve saved toward this goal and think you’re ready to pull the trigger. But the real question is: How much house can I afford?
Or is it?
Social Security’s financial cliff is coming closer into view. Experts project that the fund that pays for government retirement benefits through FICA taxes will be depleted within the next 15 years.
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