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When Should Millennials Start Retirement Saving?

This is a true story about Jane X, who graduated from a prestigious university five years ago.  She's on her third job, but she's now communications director at a private foundation and finally earning decent money.

Jane's student loans are paid off, and her good salary leaves her some money to invest.  However, like many of her millennial friends, she doesn't know a lot about investments or the differences between various retirement plans.  But she is thinking about her future and wonders when she should start saving for retirement.

There's a short, simple answer:  NOW.

The best time to begin saving for retirement is as soon as you can. Granted, relaxing on the deck of a retirement cottage overlooking the ninth green isn't first and foremost in the minds of most 20-somethings. But you can't ignore the sheer weight of the saving numbers.  Let's go back to Jane, who's 27.  If she manages to save $5,000 a year in a 401(k) for the next 40 years - until she's 67, the Social Security full retirement age for her generation - and she earns an average annual return of 7%, she will end up with $1,035,632.  But if she waits 10 years to start saving, when she's 37, her accumulated savings will be just $490,027.

If you're convinced that now would be a good time to get started, consider these seven steps that could help you reach your goals:

1.  Budget and save.  It's difficult to be diligent about setting aside money for retirement when you're young and have a million things you'd rather do with your money.  But if you're able to set objectives for saving and you do your best to stick to them, it could pay off beautifully down the road.  Try to train yourself to live within your means while you move ahead in your career and your personal life.

2.  Take advantage of employer retirement plans.  Your company probably offers a tax-deferred retirement plan - a 401(k) or a 403(b) - and your employer may provide matching contributions (for example, up to 3% of your compensation) to go alongside the pre-tax earnings you put into the plan.  With all of that money invested for the long haul, it can grow and compound and you won't be taxed on the growth until you pull out funds during retirement.

3.  Don't forget about IRAs.  Regardless of whether you participate in an employer-sponsored retirement plan, you also can set up an IRA.  With a traditional IRA, the money you put in may be partly or wholly tax-deductible, if your salary is relatively low.  But here, too, you'll be taxed on withdrawals during retirement.  Another option, a Roth IRA, doesn't give you a tax deduction on money going in but may provide 100% tax-free distributions in retirement.

4.  Invest wisely.  This is good advice not only for money in tax-advantaged retirement accounts but also for money you invest in taxable brokerage accounts.  We can help you find the investment balance that best suits your personal needs, objectives, risk tolerance, and other circumstances.  Although there's no foolproof method, you should have more leeway to be aggressive now than you would when you're nearing retirement or already retired.  Of course, past performance is no guarantee of future results, but you can use historical stock market trends to help shape your investment strategies.

5.  Expect the unexpected.  Even the best-laid plans of retirement saving can be derailed by an emergency such as a hospital stay or the loss of a job.  Try to leave enough wiggle room within your budget to account for some unforeseen financial trouble.  Rather than put yourself in a position to have to skip or slash retirement plan contributions, remember to put aside cash in a "rainy day" fund.  Most experts recommend building up enough to sustain you for at least half a year during which you may have no other income.

6.  Avoid debt like the plague.  One of the biggest impediments to retirement saving is a crushing debt load. You're not doing yourself any favor by deferring part of your salary to an employer plan at the same time that you're charging luxury items on a credit card with sky-high interest rates.  That's not to say that borrowing isn't warranted at times - perhaps to help buy a home or car - but make sure it fits into your overall plan.

7.  Educate yourself.  Finally, you can improve the chances for a secure, comfortable retirement by learning all of the rules of the road, including the nuances of investments and the tax differences between various accounts.  Knowledge is your friend. Rely on us to give you a solid foundation for going forward.

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