Retirement Strategies for Millennials

Retirement planning should not be something that you do once in your life and then forget about. Rather, it should be an ongoing process that changes and evolves as you move throughout the various stages of your life.

It’s logical that the earlier you start planning and saving for retirement, the greater chance you’ll have to accumulate a sizeable nest egg and be able to retire comfortably when you’re ready. For many Americans, their first opportunity to start saving for retirement comes with their first professional job, coming out of either high school or college.

Start in Your 20s

While individuals in their 20s may just be starting out on the career ladder and earning less money than they will later in life, their expenses may also be lower, especially if they are single and have not yet started a family. This can make the 20s an ideal time to start a disciplined, life-long retirement saving and investing plan.

Often, the biggest challenge for these young millennials is simply making retirement planning a priority. With up to 50 or more years between them and retirement, it can be easy to put retirement saving on the back burner. “I’ve got plenty of time until retirement, and I don’t have much disposable income right now, so I’ll set up a retirement savings plan in a few years,” is the mindset of many 20-somethings.

This can lead to putting off saving for retirement until many years later, if at all. By this time, they have lost years during which the power of compounding could have been working for them to build their retirement nest egg — and these are years that can never be recaptured.

For example, suppose an individual starts an IRA at age 22 and has accumulated $5,000 by the time he reaches age 25. Even if he never invests

another penny, his account will have grown to $54,787 when he’s 65 if it earns an average of 6 percent per year (compounded monthly).

But suppose he waits 10 years until he’s 32 to start his IRA and accumulates $5,000 by the time he reaches age 35. In the same scenario, his account will have grown to only $30,113 when he’s 65. Notice that the individual saved and invested the same amount of money — but a delay of 10 years getting started cost him more than $24,000.

The “Rule of 72”

This is a mathematical formula that illustrates the power of compounding and how time can work in the favor of long-term savers and investors. The rule states that money approximately doubles in the number of years equal to 72 divided by the return generated. So if you earn 6 percent a year on your savings, your money would double in about 12 years (72 / 6 = 12). Therefore, approximately each decade that is delayed in saving for retirement could cost you the opportunity to double your money.

Given this, individuals in their 20s should make every effort to start saving for retirement as soon as possible. The first step is to participate in employer-sponsored retirement savings plans, or open an Individual Retirement Account. Then commit to making regular contributions to the plan — ideally via a payroll deduction or automatic monthly transfer of funds from a checking account into the plan.

While the initial contribution amounts may be small, contributions can be increased over time as income rises. Starting and following a disciplined retirement saving strategy like this in the 20s can help lay the foundation for a financially secure retirement down the road.

Retirement Planning Strategies for the 30s

The 30s, however, often represent a time of greater earning potential as individuals start to advance in their careers and move up the corporate ladder. At the same time, though, they may also have started a family and assumed more financial responsibilities like a mortgage, life insurance, multiple car payments, and all of the expenses involved in raising children.

A common retirement planning challenge at this stage of life is balancing the goals of meeting growing financial responsibilities like these while also maintaining consistency in retirement savings.

Ideally, this is the life stage where individuals should be gradually increasing the amount of money they are contributing to their retirement plans. One way to accomplish this is by making a commitment to save a certain percentage of income for retirement, instead of a fixed dollar amount. This way, contributions to retirement accounts will increase along with income.

For example, suppose an individual decided at age 25 to contribute 10 percent of his pre-tax income into his Individual Retirement Account. At the time, his annual salary was $30,000, so he started out contributing $3,000 a year (or $250 a month) into his IRA.

Today he is 35 years old, and his annual salary has increased gradually to a current level of $50,000. By following this strategy, he would have increased his IRA contributions each time his salary rose and be contributing $5,000 a year (or $416 a month) to his IRA now, which is the annual IRA contribution limit in 2012 for anyone under 50 years of age.

Setting Financial Priorities

As individuals in their 30s begin to advance in their careers and earn more money, it can be easy for this extra income to be swallowed up in the growing expenses they face. They may also desire to spend money on some luxuries they may not have been able to afford earlier in life — things like nice vacations, fancy cars and boats, and dinners at expensive restaurants.

This is understandable, and there’s nothing inherently wrong with spending money on these kinds of things. But planning for a financially secure retirement that’s looming ever closer requires setting some financial priorities.

One of these should be maintaining consistency in making retirement plan contributions and increasing the amount of these contributions as income rises, as noted above. Eventually, you may reach the annual contribution limits allowed by law for qualified retirement plans like IRAs and employer-sponsored 401(k) plans.

Retirement planning in your 20s and 30s can provide a sound base for the future.

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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