Saving for Retirement: Millennial Edition
The good news? There are proven ways to begin putting together an effective, smart plan for the future while managing—and, perhaps, even reducing—your debt today.
Here’s where to begin:
Focus on consistently saving something (anything!) first
Saving for retirement is a major long-term financial goal, so don’t be afraid to start small. Establishing automatic contributions to your retirement account can help make saving habitual—which, in turn, allows you to take the first, most important step toward making your financial aspirations a reality: Saving some amount of money from each paycheck consistently!
The earlier you begin contributing to retirement, the more time compounding interest—essentially, earning money on your money—has to work its magic. Hypothetically speaking, a person who invests just $100 a month from age 22 until age 67 could potentially have $379,000 by retirement age, earning an average 7% annual return.
In addition to automating your contributions, keep your retirement account in mind any time you come into unexpected cash such as a bonus from your employer, a raise or cost of living increase, return of a security deposit from a landlord, or a tax refund.
Take advantage of retirement plan tax benefits
Based on your income and the retirement savings plans for which you are eligible, simply placing your money into one (or more) of these tax-advantaged retirement accounts could potentially lower your tax bill:
- If your employer offers a workplace sponsored retirement plan—a 401k or 403b, for example—your contributions are made with pretax dollars. In 2019, the Internal Revenue Service (IRS) allows you to contribute up to 19,000 to a 401(k) or 403(b).[ii]
- You may be eligible to open or contribute to an IRA or a ROTH IRA depending on your adjusted gross income (AGI)—even if you already participate in an employer-sponsored plan. In 2019, the IRS allows contributions up to a total of $6,000 to an IRA, ROTH or a combination of the two. Are your IRA contributions tax deductible? It depends on your income and whether you or your spouse is covered by a retirement plan at work. ROTH IRA contributions are made with after-tax dollars, but the money in the account grows tax-free.
You may also qualify for other tax benefits such as the Saver’s Credit—just for saving for retirement.
Set a goal to pay off one debt
Debt doesn’t just make it difficult to save for other goals: If the debt is interest-bearing, it costs you money to carry.
Most of us have more than one type of debt since car loans, student loans and credit cards tend to present themselves at around the same time in life. It helps to focus on eliminating at least one of those debts so that you have more financial flexibility.
Whether you choose to eliminate your smallest debt or tackle a larger one more aggressively, paying a debt off will give you more cash that you can put towards retirement savings.
Reduce the biggest budget category you can control by 10%
Aside from budget categories you can’t easily change—rent, a car payment—where do you spend the most money? Dining out? The grocery store? Commuting costs? Reduce what you spend in that category by just 10%, put the money into your savings instead, and you may be surprised by how fast your retirement account begins to grow.
Research ways to reduce the cost of your debt
If you have student loan debt, explore whether you can lower the cost of it. For example, if you work in a profession the government considers to be a public service—a designation which can apply to teachers, government employees at Federal, state, local and tribal levels, and some non-profit employees—and have made 120 qualifying loan payments to your Federal college debt after October 1, 2007, you may qualify to apply for the Public Service Loan Forgiveness Program[iii]. Or if your employer offers student loan repayment assistance or access to partners who specialize in student loan refinancing, these voluntary benefits might also provide you with ways to pay your loans back more quickly and/or refinance them into a less expensive loan.
Don’t forget to take advantage of any education-related tax benefits for which you may be eligible when filing your taxes. The American Opportunity Tax Credit or the Lifelong Learning Credit, for example, may reduce the amount of income tax that you owe, leaving more money in your pocket that you could put towards retirement.
Keep your goal in sight
Now that you have a set of tips to help you find more ways to save, remember that your goal is saving for retirement – so be sure to stash your newfound income instead of spending it. The best way to do this is to keep a list of your savings goals, so that you know exactly what you’re saving for and how to prioritize.