By Christina Gustin
Faced with student debt and entry-level salaries, it is hard for Millennials to embrace the idea of putting money away for the future. Many young workers think they have plenty of time to save for retirement and therefore delay participating in a 401(k) plan.
But the truth is that contributing even a small percentage of your income to a 401(k) plan now may make more of an impact than a larger amount saved later. Because of the power of compound interest, the most valuable tool that Millennials have is time. Waiting ten years to start saving may make a difference of hundreds of thousands of dollars!
Create your retirement vision
I have news for you: someday, you are going to get old. 401(k) planning requires us to first take a step back and really imagine our own retirement. For Millennials, this may be hard to picture because it’s years away, but it’s important to spend time thinking about what you want those years to look like. Dream big. Do you love to travel? What if you could retire early? Do you have a hobby you’d love to do full time? Your dream will evolve over time, but visualizing your goal will help you feel good about saving to achieve it.
Saving money is like any other discipline—you have to develop good habits. Today’s retirees fund their lifestyles with sources of income like pensions and Social Security, in addition to whatever they’ve saved and invested over the years. Younger generations are finding that pensions are virtually non-existent in today’s job market, and the prevailing wisdom is that Social Security benefits in 30 years will probably be dramatically different—and less—than they are today.
We have to educate ourselves on how to fund our own retirement. The magic of compounding is that the sooner we start, the more likely we may be able to provide the comfortable lifestyle we desire for ourselves and our loved ones.
Fund your 401(k) plan
Once you land your first job, one of the easiest ways to save for retirement is to participate in an employer-sponsored savings account like a 401(k) plan. The idea is to set aside a piece of each paycheck, invest it and let it accumulate until you retire.
There are a couple of important advantages to an account like this:
- Tax deferral: In a traditional 401(k), every contribution is made with pre-tax dollars, meaning you won’t pay income tax on that money until it is withdrawn. You’re reducing the amount of taxes you’re paying this year by making a contribution. While your money is invested, it can grow tax deferred. You won’t be taxed on any earnings such as dividends, interest or capital gains until the money comes out of the account during your retirement.
- Automation: Savings can be automatically deducted from your paycheck. That’s a positive because if you don’t get it, you can’t spend it.
- Employer match: Many employers will match a certain amount of your contribution each year. It’s like getting a bonus for saving! Take advantage of your employer match—this is like free money. Money is being left on the table each year by American workers who don’t take advantage of their employer match. Don’t let this happen to you!
Make sure that your savings are being invested and not sitting in cash. Every 401(k) has different investment options, but the key is to look for something with broad diversification and an age-appropriate mix of investments that are suitable for your risk tolerance.
It’s important not to cash out your 401(k) until you’re of retirement age. If you move jobs, ask about rolling it over from your old job into the 401(k) at your new job, or open an IRA account and roll the assets there. If you cash it out before age 59½ you may owe income tax plus a 10% penalty, and you’ll be more likely to spend it simply because it’s accessible. Think of this as a way to hide money from yourself until you retire.
Spend the time and get your retirement plan on track
Overall, you have to invest in your financial future. Spend 30 minutes talking to your human resources contact about how to have deductions made from your paycheck. Consider increasing the percentage you contribute over time as your salary grows. By dedicating a few hours to thinking about your retirement goals and making sure you’re on track, you’ll feel good about your retirement plan, and your money will start to work for you!
Christina Gustin is a financial advisor with UBS Financial Services in San Diego. She graduated from UCLA and has more than 11 years of experience in the industry. Gustin reminds readers to seek out individually tailored financial advice and be aware that investing involves risks.
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