Yahoo Finance 7 Things Millennials Must Do Now To Retire at 62
Millennials are between the ages of 28 and 43 right now, according to Beresford Research. This means that even the youngest in the generation are likely to have at least started their careers. It also means that, depending on how old you are, you have between 19 and 34 years left until you turn 62 and might be thinking about retiring.
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If you’re a millennial who wants to retire at 62, here are some things you should do now to prepare.
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Calculate Your Retirement Savings Goal
One of the very first steps is to figure out what your lifestyle and budgetary needs will be when you retire. You can calculate this by looking at your current lifestyle and cost of living and using that to predict your future needs. The numbers might change over time, but that’s OK — having a general idea is better than nothing.
“Carefully calculate how much your household spends each year. You can come up with a frugal budget, a regular budget, and a champagne budget. Now, multiply your annual expense by 25x to come up with your retirement savings goal,” said Emily Luk, CFA, CPA, and co-founder of Plenty.
“These retirement saving targets may sound high, but remember that compound interest will see your balance grow exponentially as you approach retirement,” Luk added. “And your income is likely to steadily grow until then, as well.”
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Make Plans To Reach Your Retirement Goal
After you get an idea of how much you’ll need to retire comfortably, the next step is to figure out the best course of action to reach that goal.
“Once you’ve seen where you’re at compared with where you need to be to reach your goal, you’ll be able to determine how much you’ll need to save each month,” said Todd Stearn, founder and CEO of The Money Manual.
One way to start moving toward that goal is to set up automatic savings.
“You can have [the amount you need] automatically transferred to a savings account each payday, or as close to it as your budget allows,” Stearn said. “If you aren’t able to save as much as you need to right now, make note to revisit this amount over time so you can increase it as your income grows.”
Another way to calculate your monthly savings amount is to base it on your income.
“Though everyone’s financial journey looks different, generally millennials should direct at least 10% to 15% of their income toward their retirement goals, after building a sufficient emergency fund,” said Dan Goldfarb, senior financial professional at Empower. “Based on current cash flow considerations like student loan debt, mortgage/rent and auto payments, child care costs, they should also consider saving more than this amount.”
Take Advantage of Time — And Compound Interest
You’ve heard it before: When you’re young, you’ve got the power of time on your side. And that means now’s the perfect time to start learning about and taking advantage of compound interest.
Many saving and investment accounts earn compound interest. This is essentially interest earned on the balance currently in your account — and the interest itself. The higher your balance, the greater the account’s interest rate, and the more frequently the interest compounds, the more quickly your money can grow.
“I think the most important step for millennials to take is to actually start saving as much as possible for retirement, but more importantly, [to] understand interest. Both the pros (compounding returns) and the cons (inflation) are crucial to learn,” said Elizabeth Schleifer, CFP and financial advisor at Armstrong, Fleming & Moore, Inc.
“Starting to save for retirement in your 20s versus your 40s can result in a difference of hundreds of thousands of dollars because of the power of compounding returns,” Schleifer continued. “Every 10 years you delay saving, you’ll likely need to double the amount you save each month to achieve the same level of retirement savings.”
Bear in mind that interest can also work against you. What costs $100 now could cost twice as much in a few decades — assuming 2.5% inflation. If you haven’t already, factor this into your retirement calculations.
Contribute To Your Retirement Accounts
There are many different retirement accounts out there — like 401(k) plans and IRAs. While each one works slightly differently, they all have the same basic purpose of getting you ready for retirement.
Whichever type of retirement account you have, maximize your yearly contributions as soon as possible for the most benefit.
“One of the shrewdest steps millennials can take to prepare for an early and successful retirement is maximizing contributions to their 401(k),” said Brittany Pedersen, director of deposit and payment operations at Georgia’s Own Credit Union. “It’s critical to know how much of your salary your employer matches and take advantage of it. For example, if your company matches contributions up to 6%, make sure you are contributing at least that amount to your 401(k).”
Your employer’s contributions are essentially free money that can help you reach your retirement goals sooner.
“Consider investing in a Roth IRA, which is another type of individual retirement account,” Goldfarb said. “When you have a Roth IRA, you contribute after-tax dollars — up to a certain limit every year. That money stays in your retirement investment account and can potentially earn returns as you work your way toward retirement.”
Contribute Any Surprise Money to Your Retirement Savings
“Every time you get a raise or bonus, it’s wise to immediately put that money into your 401(k). Since it is money you weren’t expecting, you are less likely to miss it. If that takes you above your contribution limits, invest it in another retirement account, like an IRA,” Pedersen said.
Be aware that certain accounts, like 401(k) plans, often have fees. Your employer might be paying them right now, but you’ll typically have to start fronting the bill if you leave your job and want to keep the account. You may, however, be able to roll over your current account into a new one with your next employer to avoid these fees.
Figure Out Your Risk Tolerance
Investing is a smart way to build wealth and reach your retirement goals. But all investing comes with some level of risk. There are also no guarantees that you’ll see the exact returns you’re hoping for — which is why diversifying helps.
“Examine how much risk you can take. If it’s small, you’re going to grow your money, but not aggressively. If you have 10 years, go a little more aggressive,” said Angela Holliday, president at Frost Brokerage Services, Inc. and Frost Investment Services, LLC at Frost Bank. “If you can be more aggressive, you have the potential to earn more. At the end of the day, you’re still putting money away and have potential. There is never a downside to saving for retirement at an early age.”
Diversify Your Investments
You might also want to consider diversifying your portfolio as you go. This can help mitigate risk as you build your retirement savings fund over the next couple of decades.
“You’ll want to make sure your retirement portfolio consists of a diversified range of investments that you plan to hold onto for the long term,” Stearn said.
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This article originally appeared on GOBankingRates.com: 7 Things Millennials Must Do Now To Retire at 62
