Though the millennial generation is just starting to enter the workforce, they are a forward-thinking bunch. And with anyone who is looking to get ahead in their future lives and careers, preparing for a comfortable retirement is always a good practice to cultivate. However, college courses and economics classes often do not prepare students, now employees, for maximizing their retirement savings. To cut down on the myths, here are a few tips that financial advisors in NJ often give to their millennial clients.
When choosing that first job, look for investment packages. Does the employer offer a 401(k)? Even better, does the employer match the amount an employee deposits into a 401(k)? If so, this is an opportunity that should be hard to pass up. Essentially, such a policy means that the portion of a millennial’s paycheck that they deposit into a retirement savings account will be doubled, simply because of the employer’s policy. While this is a great first step, keep in mind that 401(k) accounts do not often contain the most aggressive investment portfolios. So, once millennials have made 401(k) savings a monthly habit, consider opening an additional retirement investment account—an IRA.
An IRA allows investors to deposit money into an investment account and withdraw it later, tax-free. This is an ideal opportunity for millennials as they are probably in a lower tax bracket now than they will be when they retire. For example, consider a student just entering medical school. If they contribute the maximum amount to an IRA every year, they will be paying relatively low-income taxes on that amount, if any. However, once they graduate from medical school and have grown a practice for themselves, their income tax might be as high as 40 percent. However, any withdrawals made from the IRA at that point would not be taxed at this rate, nor would they be taxed at all. This makes an IRA investment account the ideal place for millennials to start saving their hard-earned money.
Since the money will be held within an IRA or a 401(k) for a long period of time, often 20 years or longer, there is a lot of room for the money to grow. Similarly, if an investment goes south, there will be enough time for the account owner to recover and regain their lost funds, albeit in a different investment. As such, consider a more aggressive investment portfolio during the early days of investment. High risk stocks often offer the highest amounts of return, but they are also the most volatile, or most likely to plummet. So, monitor these stocks carefully and decide on a point where the stock would have to be sold, regardless of how well it might do in the future. A good rule is to never let a stock drop below eight to 20 percent of its original purchase price. Pick a percentage within that range, and stick to it. This will require some monitoring of investments, but treat the IRA like another job, one that pays the millennial to take care of it.
Finally, make a plan. Decide what income percentage will go towards investments and other retirement savings, but be sure to create a non-retirement savings plan as well. There will definitely be unexpected but large expenses that will occur in the future, and millennials do not want to be pulling money out of their retirement funds to pay for those bills. Instead, there should be enough money set aside in a savings account or other easily accessible location that can cover a certain number of months of rent, a certain number of insurance or car payments, and any other monthly living expenses that a millennial might incur.
With these financial plans in mind, know that now is the time to start saving. Since the majority of investments tend to compound upon themselves, failing to invest right away will often mean additional lost earnings in the future. By saving money now, even if it is a smaller amount, know that it will grow in the future into a much more substantial sum.
To learn about more ways in which millennials can get started on preparing for retirement, contact a New Jersey financial advisor to schedule a consultation.