Student loans, astronomical rental prices, a higher cost of living — the odds are certainly stacked against millennials.
But if you were born anywhere between 1981 and 1996, don’t worry, there are ways you can enjoy a comfortable future without having debts lurking in your shadow.
One of the primary goals for most Americans is to live comfortably in retirement and maybe even retire early. If you’re a millennial worried about your future, we’re here to help.
Below, you’ll find our guide on how to start a retirement plan so you can live your sunset years without a care in the world.
Different types of retirement accounts
Millennials are faced with many financial roadblocks.
A Morning Consult study found that 52 percent of millennials with student loan debt avoided or postponed medical or dental care, 1 in 2 student debt borrowers have put off homeownership due to their loans, and 2 in 5 have delayed quitting a job.
While higher education is seen as the key to the middle class, the consequences of the recession are hitting them hard.
However, millennials are remaining to stay positive. In fact, a T. Rowe Price Retirement Savings and Spending Survey found that 43 percent of millennials have plans to retire before the age of 65.
This positivity and determination can be beneficial to many millennials in the long run, especially when it comes time to bid adieu to the job(s) they’ve held most of their life.
When it comes to saving for retirement, it’s best to put a portion of your income toward a retirement plan. Many experts suggest contributing 15 percent of your income in a tax-advantaged retirement account.
There are numerous tax-advantaged retirement plans you can take advantage of to grow your nest egg, such as 401(k) plans and IRAs. Doing so is a great way to grow your money without working hard.
Take a look at some of the most popular types of retirement plans below.
1. Traditional 401(k)
A traditional 401(k) is a company-sponsored retirement account that allows employees to make contributions.
When an employee makes a contribution, their income taxes for the year are reduced, but when they withdraw from the account in retirement, their withdrawals will be taxed.
The 2020 contribution limit for a traditional 401(k) is $19,500. However, if you’re 50 or older, there’s a catch-up contribution that allows you to contribute an additional $6,500.
What’s great about a traditional 401(k) is that many employers offer a 401(k) match. This means your employer might elect to match some of your contributions up to a specific dollar amount.
For example, your employer may opt to contribute 50 percent of your contributions up to 5 percent of your salary. So, if your annual salary is $60,000 and you contribute $3,000 to your traditional 401(k), your employer will contribute another $1,500.
To prepare for retirement, make sure you take advantage of your employer’s match. After all, this is free money!
2. Roth 401(k)
A Roth 401(k) is very similar to a traditional 401(k). It’s a company-sponsored retirement account where you can make contributions, and your employer might offer a 401(k) match.
The contribution limits for 2020 are also the same as a traditional 401(k). The difference? The contributions you make are taxed, so you won’t receive a tax break for the year you contribute.
However, this means when you make withdrawals during your retirement years, you won’t have to pay taxes.
3. Traditional IRA
Some workers don’t have access to an employer-sponsored 401(k). If you don’t have access to a 401(k), it is best to open an IRA.
A traditional IRA (individual retirement account), works similarly to a 401(k) in that you can make contributions on a pre-tax basis. However, when you turn 59 ½ and are eligible to make take out money, your withdrawals will be taxed.
Additionally, employers aren’t tied with your IRA, which means they can’t match any of your contributions. IRAs also have lower contribution limits, coming in at $6,000 for the 2020 tax year.
However, if you are 50 or older, you can contribute $7,000 to your traditional IRA.
4. Roth IRA
A Roth IRA is similar to a Roth 401(k) in that contributions are made with after-tax dollars. This means when you withdraw funds in retirement, you won’t be taxed. However, you won’t receive a tax break for the year you make contributions.
Roth IRAs also have the same contribution limit as traditional IRAs. However, it is important to note that if you’re contributing to both a traditional and Roth IRA, you can only contribute $6,000 if you’re under 50 and $7,000 if you’re over 50 to both accounts combined.
So, you can’t place $6,000 in each account in one year.
How to save for retirement
Now that you know the retirement vehicles that are available to you, it’s time to learn some tips on how to save.
Whether you have a 401(k), an IRA, or both, here are some tips on how to grow your nest egg.
1. Create a budget
Creating a budget is the first step you should take when it comes to saving for retirement.
Doing so will allow you to map your income and expenses to see which areas you can save and set aside more money for investing and your retirement accounts.
So, how do you make a budget to save for retirement? Follow these steps:
- Step 1: Calculate how much retirement savings you need to live comfortably in your sunset years
- Step 2: Track your spending
- Step 3: Create a budget by calculating fixed expenses, medical costs, and money for leisure
- Step 4: Invest in supplemental retirement savings, such as an interest-bearing savings account
2. Pay off loans early
When a bank or lender gives you a loan, they tack on interest for the privilege of borrowing their money. Over time, interest accrues and increases the amount of money you owe in the long run.
Whether you have student loans, a car loan, or mortgage, it’s best to pay your loans off early. One way to do this is by refinancing your loans.
If you have multiple loans, your loans will be consolidated and will typically have a lower interest rate.
3. Get a side job
Do you have a hobby, such as creating jewelry or taking photographs? Turn your passion into a side gig! There are plenty of ways you can hustle to make money off of something you’re good at.
Aside from your 9-to-5, spend the weekends or a few nights working a second job. This can be at a restaurant, as a rideshare driver, selling items online, or freelancing.
Any money you make from these gigs, set aside in your retirement plan.
4. Cut spending
Millennials are often criticized for their spending habits on things like craft coffee and vegan pastries. If you’re a millennial who likes the finer things in life, it may be time to reevaluate.
This doesn’t mean you can never go to your favorite coffee shop again or out on the town with your friends for happy hour. It just means you need to cut spending in certain areas.
Any money you save from these cuts should be put toward your retirement plan. Consider these tips on areas to cut spending:
- Instead of going out to eat, try meal prepping on the weekend so you can bring lunch to work
- If most of your paycheck is going toward housing, consider getting a roommate, downsizing to a smaller place, or living in a less expensive area
- Limit the number of credit cards you have to reduce the urge to spend
- Go on free activities with friends, such as going on a hike or relaxing at the beach
- Carpool to work if you have a coworker who lives in your area
- Cancel costly memberships, such as gym memberships and streaming service subscriptions
Start a retirement plan: The bottom line
It’s never too early to begin saving for retirement. The earlier you start, the less money you’ll have to set aside per month to have enough funds to live your golden years in pure bliss.
Setting aside money in a retirement savings account, such as a 401(k) or IRA, will allow your money to grow.
With a tax-advantaged retirement account under your name, you’ll be able to budget and cut spending to set aside some hard-earned cash for retirement.
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Brooke Sikora is a contributing writer for 365 Business Tips. She has a B.A. in Public Relations from the University of Oregon. When she isn’t writing, you can usually find Brooke enjoying the outdoors, traveling or exploring new coffee shops throughout San Diego