The Center For Retirement Research found millennials have caught up in many metrics — like home ownership, earnings, and labor force participation — they were previously behind on.
Yet, the CFRR study found a big reason retirement is more challenging for millennials to reach: Student loan debt. About 40% of millennial households 28 – 38 years old had student debt that took up over 40% of their income.
Large student debt payments naturally leave millennials with less income for retirement.
However, retirement is still viable. This article will cover how millennials can find room in their budgets to save more for retirement.
How to Save For a Comfortable Retirement as a Millennial
The financial environment is certainly different today than in previous generations. But much of the advice remains the same. You just have to modify it to fit current circumstances.
Here are some ways to put you on the path toward a comfortable retirement.
1. Save in a Tax-Advantaged Account
Aim to save 15% of your income for retirement.
If your employer offers a tax-advantaged account, such as a 401(k), hit the matching bonus to maximize your free money.
Then, look into opening an IRA:
- Traditional IRA: Contributions are pre-tax. Growth is tax-deferred. Withdrawals in retirement are taxed at your ordinary rate.
- Roth IRA: Contributions are after taxes. Growth is tax-deferred. Qualifying retirement withdrawals are tax-free.
After that, consider returning to your workplace plan and upping your contributions. Use a 401(k) calculator regularly to check on your progress.
If you can’t access a workplace plan, consider an IRA. Contribution limits are lower, but you get tax advantages.
Finally, consider a taxable account. You’ll owe taxes on dividends, interest, and realized gains, but you can potentially see more growth by investing in the market.
2. Cut Spending
Some say millennials need to stop spending so much. That’s not entirely true — cutting spending on its own isn’t the key to wealth — but it helps alongside other actions.
List your expenses. There’s a good chance you’ll find one or two you can cut without impacting your quality of life.
For example, spending money on entertainment is ok. However, you might find a few free dollars by looking closely at your spending.
3. Minimize Debt
A debt’s interest rate is almost like a “negative” rate of return. Paying it down is akin to investing. If you have student loans, avoid taking on more debt — especially high-interest consumer debt like credit card balances.
If you have these debts, try to consolidate and refinance to reduce your payment, save on interest, and streamline repayment.
You can likely do the same for private student loans. If you have federal loans, you may qualify for federal loan relief or forgiveness programs, like Public Student Loan Forgiveness or an Income-Drive Repayment Plan.
4. Increase Your Income
The previous tips are helpful but only go so far. Find ways to increase your income.
If you’re employed, negotiate raises or look for new jobs with better pay and benefits.
You can also try side hustles. There are tons of options — common ones include:
- Rideshare
- Delivery driving
- Freelancing
- Selling things online
5. Avoid Lifestyle Inflation
Lifestyle inflation means spending more when you earn more. For example, buying a newer car the moment you get a promotion.
A good rule of thumb: Allocate 50% of any pay increase to savings. You can still enjoy your higher income without giving up your retirement goals.
Retirement is In Reach For Millennials
Retirement may seem daunting for millennials facing large student debts and a turbulent economy. However, the same methods and strategies can work if you adapt them to the times. Saving in the right accounts, watching spending, and chipping away at debt can get you started.
From there, millennials can find ways to raise their incomes and put some of that into their retirement fund to accelerate their progress.
If millennials continue to grow earnings faster than inflation while paying down student debt, their net worth will increase. They may even end up ahead.
Sources:
https://crr.bc.edu/wp-content/uploads/2021/02/IB_21_3-1.pdf