Retirement for Millennials

Retirement sure feels far away when you’re still vomiting at least once a year from drinking too much. Why in the world would I start considering my life as a retired old lady if there are clearly other skills and goals I need to achieve before then (see: recurring New Year’s resolution to not vomit from alcohol). The simple answer: money makes money over time. Thus, the earlier you start saving, the more free money that comes your way. Who doesn’t love free money?

Retirement can come at any age, but traditionally retirement is the age when Social Security benefits kick in (and bad news for any millennials, that age will be at least 67 for us – and it may never actually materialize. In fact, I suggest you do not consider social security benefits in your life-planning). Aside from government retirement benefits, penalty-free distributions from retirement savings accounts start at age 59½. In summary, the age for retirement benefits is between 59½ and infinity.

So, when can you retire? 

Whenever you want – you just need the cash to support yourself for the rest of your life without a job.

When should you retire and why does it matter now?

I recommend projecting a goal of age 59 ½ to 67. This age range allows you to calculate how much cash you will need to be able to live life the way you want to.

Consider this: you retire at age 65 and you live to the current life expectancy of females in the US at 81 years old. This is 16 years of living without receiving a paycheck from working. Imagine you didn’t work from age 20 to age 36 – how much would that cost? (In my case a lot, I love lattes and oysters too much). Thinking in terms of an age relative to your current age range helps to understand the magnitude of cash required (spoiler alert: it’s a lot).

How much cash do you really need?

Experts suggest 70% to 80% of your salary just before retirement is required for one year of living in retirement. If you make $100,000 per year in your 50’s, you can expect to need $75,000 per year in retirement. As it stands now, and calculating an 81-year lifespan, you need to find a way to have $1,200,000 coming your way between ages 65 and 81. $1,200,000 is an overwhelming amount of money when you’re in your 20’s making an entry to mid-level salary. I imagine it will still be scary even into my 30’s. In fact, rest assured that everyone is terrified of the amount of money needed for retirement. Go ahead and tap yourself on the back for at least reading about retirement – it means it’s on your radar. Half of America has not planned for retirement (literally, zero balance accounts for ½ of America) EPI Research.

How do you tackle saving for retirement when you feel like you’re just getting by now?

Early contributions in small amounts can grow considerably over time. For example: $5,000 put in today will grow to approximately $21,000 in 30 years. This is exciting; however, you can’t touch that $21,000 until it arrives there in 30 years. Now I’m back to not being convinced this is a good idea.

You’re still not convinced.

I invite you to consider yourself as an old lady, walking around a European city in Lululmon tights, holding the designer bag of your choice. You are crushing it – retired, fit, and traveling – you can feel that sun on your wrinkled, yet well-kept skin. When you make your retirement contributions in your 20’s, I want you to spend 10 minutes thinking about the fun things you will do during your retirement. Will you travel? Will you live in a big house? Will you have a bunch of weiner dogs in custom outfits? Your 20-year-old self needs to day dream and see the benefit of this action now. This type of visualization gets me excited about retirement, or, as excited enough to click send on the bank transfer to fund my IRA.

Okay, I’m convinced. How do I get started?

1. Explore your retirement plan options: 401k, IRA (Individual Retirement Account), Roth IRA. Education is the first step.

2. Determine if your employer offers 401k matching – this is the best possible option above all.

3. Ensure a budget safety net for yourself, then decide what contribution you can afford.

4. Open and fund the account.

   
   

Retirement Options:

	IRA	ROTH IRA	401k
Tax Deductible?	Yes, up to $5,500	No	Yes, up to $18,000
Tax Treatment When Withdrawn in Retirement	Fully Taxable (Principle & Growth)	Non Taxable Withdraws	Fully Taxable (Principle & Growth)
Withdrawal Rules	Required Withdrawals at 70.5 years	No Required Withdrawals	Required Withdrawals at 70.5 years
Fun Facts	Can take out 10k for a first-time homebuyer (imputed as income - no penalty)	What if tax rate falls? What if you make less money when you take the money out?	Employer can match or contribute funds
Setup & Maintenance	Setup on your own account via a broker like E*Trade, your bank, or another platform.	Setup on your own account via a broker like E*Trade, your bank, or another platform.	Employer can match contributed funds.

Which is better: Roth IRA or IRA?

There is no objective answer here. A Roth IRA is better if you anticipate to be earning a lot of income in retirement that pushes you up to a higher tax bracket than you are in now. The benefit of the Roth IRA is that you pay the income tax now in exchange for tax free withdrawals (principle and growth) after 59½ years old. You also do not fundamentally believe that the tax rate will go down in the future.

An IRA is better if you don’t have a lot of money to save for retirement now, but you want to get something started. The benefit of an IRA is that you get a deduction for up to $5,500 of funds that you contribute. For millennials, this tax savings is about $1,650! Simply put, you contribute $5,500 to your IRA while reducing your tax bill by $1,650 in the same year. It’s as if you only had to put in $3,850. Personally, I participate in an IRA because I prefer the simplicity of one retirement account. If you have worked for a few employers in the past decade, there is a good chance you have multiple 401k plans setup with a couple thousand dollars in each. As such, the idea of having a centralized account for my retirement makes me happy. And, my current employer does not match 401k – so there is no benefit for me to use their program (unless I wanted to fund more than $5,500 per year).

Special Tax rules:

1. You cannot deduct contributions to an IRA and a 401k fully in the same year unless you are under $61k in annual income. Pick one type of account per year to fund for ease of management.

2. There is an annual income limit to contribute to Roth IRA, but there are ways around this by rolling an IRA into a Roth IRA. (Past the scope of this article).

   
   

Summary:

1. Setup your old-future-self for success by starting a retirement account and contributing anything you can in your 20’s. This money will grow the most as it has the most time to compound.

2.  Make saving for retirement more fun by imagining your life in retirement to make those savings contributions more palatable.

3. If you can’t get 401k matching and you will contribute less than $5,500 per year, don’t bother setting up through your employer plan. It’s nice when your employer takes money out of your paycheck regularly, but chances are good it’s more admin work to roll that account over if you ever leave the company than to just setup your own account initially and fund it.

4. IRAs are great for tax deductions. Roth IRAs are great for your old rich self if you see yourself being in a higher tax bracket. 401k with employer matching takes the cake.

5. Pro Tip: don’t buy that extra drink that makes you puke - put that $8.50 in your IRA.