I might be a touch biased (considering that I am part of Gen Y), but I feel that millennials have a lot of things to worry about that the preceding generation did not have to take into consideration. The priorities of this generation differ because most of us will not enjoy the security of working with the same company until retirement (and upon retirement, be provided with a company pension). Company pension plans are becoming more and more rare. So, instead, millennials prioritize enjoying the benefits of a “retirement lifestyle” right now! There are ever-increasing pressures to “go abroad while you’re young” and “become an entrepreneur” and “get a job where you can work from home and travel.” While this sounds great (believe me, I’d love to be writing this article from a beach), these goals are not always practical. Especially when you consider the other factors at play, such as home ownership and saving for retirement.
There are conflicting arguments — among financial experts and journalists — about whether millennials are saving enough money for retirement. Much information suggests that our generation is saving more than the generation before us. Other information suggests many of us are not saving anything for retirement. The general consensus, though, is that even if we are saving for retirement, it’s not enough to retire comfortably. Millennials are currently dealing with rising housing costs that do not align with wage increases; millennials also delay their earning years with prolonged educations and later entry into the workforce (which comes with student loan debt). When considering all of these barriers, in addition to our preference for fun and adventure during young adulthood, it makes sense that we do not have any leftover funds to put away in savings.
You might be reading this article thinking that you should start researching different retirement accounts or signing up for your company’s 401K matching program. Then, as quickly as those thoughts arrived, they disappear: you remember your upcoming trip to Spain, or start fantasizing about that new SUV you’re hoping to buy next year. You have a lot of financial requirements for the present, and retirement seems so far away when you’re in your twenties that it feels easier to postpone your retirement savings until a later date. Mm…I hear you. But I would strongly encourage you to get in touch with Future You and start the process of investing in your future. On that note, I want to share some of my own findings about how you can start saving smart.
I love fun, adventure and time away from work as much as the next person, but I always make my retirement savings a priority because of one simple concept: the powers of compounding. “Compounding Interest” is essentially the additional interest that you are earn off of the first round of interest generated by your savings contribution. A simple example: if you invest $100.00 at 5% interest compounding annually, your account would have $105.00 at the end of year one ($100.00 investment + $5.00 interest). At the end of year two, you would have $110.25 ($100.00 investment + $5.00 interest from year one + $5.25 interest for year two). You earned more interest in year two because the 5% interest was calculated based on the total in your account ($105.00), instead of just the investment portion ($100.00). That extra $0.25 represents your compounded earnings.
Now, $0.25 may not seem like a big deal. But assume you start investing right now and decide to invest just $1200 annually ($100 per month) for the next 40 years, with a 5% return compounded annually. When you retire in 40 years, you will end up with approximately $152,208.00 in savings! Of this total sum, $55,008 is compounded interest. That means you earned $55,000 just off of the interest on your $100 monthly contributions (and didn’t have to invest extra money to get it).
Now, let’s consider the situation if you don’t take my (ahem, excellent!) advice, go on a couple trips, and start saving five years from now, instead of today. Assume we use the same situation above ($100 per month with 5% compounded return). Upon retiring 35 years from now, you will have approximately $113,804.00 in your retirement account. Of this, $34,004.00 will be compounded earnings. This means that waiting five years to start your savings account has cost you a total of $38,404 in retirement savings! Those extra $100 monthly contributions being put off for five short years cost you $21,000 in compounded earnings alone!
The example above is a simple one, with low monthly contributions contributions. But it shows the powerful effect that compounded earnings can have on your long-term investments.
Hopefully, the example above also motivates you to start (or increase) your retirement savings! So, how do you start saving for your future? If you are lucky enough to have an employer-sponsored pension or retirement savings plan with matching contributions, start making the maximum contributions immediately! Those matched contributions are free money. I repeat: you are turning down free money every day that you do not sign up. If your employer will match up to 5% of your salary, for example, that is essentially a 5% raise, which you’ll begin receiving on the day you start contributing.
If you do not have access to an employer-sponsored plan, or you want to save more than the matched contributions, you have other options. It’s generally a good idea to choose tax-advantageous accounts for your retirement savings. In the United States, you can open your own individual retirement account (IRA) or a Roth IRA. In Canada, you can open a registered retirement savings account (RRSP). These accounts will offer advantages and savings such as tax-deferred contributions, tax-free growth and gains, and tax-free withdrawals, depending which type of account you choose to open.
No matter which retirement savings account you choose to open, the most important thing is to start contributing to it as soon as possible. If you are a millennial and are thinking about starting to save for your retirement, time is on your side! You still have many years to allow your contributions to grow and earn money. (And the sooner you start saving, the sooner you can retire to the beach!)
Jodi Paradoski is a full-time accountant and coffee addict who loves animals, taxes, spreadsheets and savings accounts. She recently started her own blog, Economical Girl’s Guide!
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