The Millennial’s Guide to Retirement Planning

At this point in your life, retirement is probably so far off in your future that it’s difficult to give it much thought.

After all, you’ve got a lot to accomplish in the meantime. There are student loans to pay off, for starters. But there are also far-flung countries to visit, a career to grow, a house to buy and perhaps a family to start. Seriously, it’s hard enough to juggle plans for next week, let alone 30 or 40 years from now (especially when you're saving for a down payment on a home).

But giving retirement some brain space today can pay off big time down that road. That’s because of the inescapable truth and beauty of compound interest. Basically, $100 saved today will be worth a lot more in retirement than $100 that you save 10 years from now. So, to get you started saving right away, here’s a millennial’s guide to retirement planning.

SAVE FOR RETIREMENT NOW, AND IN A TAX-FRIENDLY WAY

Thanks to compound interest, the sooner you start saving for retirement, the better. If you’re working full-time, there’s a good chance you’re already enrolled in your employer’s 401(k) savings program. If you aren’t yet, do it. Basically, a chunk of each paycheck will go directly into a tax-advantaged retirement savings account that’s invested in a fund or funds that you choose. Often you can pick a fund that’s tailored to your age. The beauty of a 401(k) is that you don’t pay any taxes on your contributions, and all the growth over time is shielded from taxes as well. If you don’t have this option at work, you can open your own IRA (see below).

If your employer matches your contributions try to contribute enough to get the full match — it’s essentially free money from your workplace. If you can’t, don’t worry! Just contribute what you can, even if it’s just 1 percent. Every contribution counts, especially over long time periods. As you pay off debts or get raises, work to increase your contribution little by little, maybe 1 percent each year.

In addition to traditional retirement accounts like 401(k)s or IRAs, you could also contribute to Roth accounts. With a Roth IRA, or Roth 401(k), you pay taxes on your contributions up front, but those withdrawals will be tax free down the road — it’s the inverse of an IRA or 401(k) from a tax perspective.

Pro tip: Right now, you’re probably in the early stages of your career, which means your salary, along with your tax bracket, is probably lower than it will be in 10 or 20 years. If you contribute to a Roth IRA or Roth 401(k) today, you’ll pay lower taxes now and then you won’t have to pay them later. As your salary grows, and you climb tax brackets, you might decide to switch and make pre-tax contributions. Plus, when you get to retirement, it’s good to have a mix of both Roth and traditional savings.

STRATEGICALLY PAY DOWN DEBT

If you have debt (and most of us do), it can feel like a weight that’s preventing you from reaching your other goals. Build a plan to get rid of it. That means strategically paying a little more than the minimum each month (prioritize extra payments using a strategy like debt snowball or avalanche). Keep this up month after month, and it’s like compound interest in reverse — your debt shrinks faster and faster with the same payment. As your debt shrinks, you’ll eventually have more funds available for other goals, like saving for retirement, or even that exotic trip.

One way to stick with a strategic repayment plan is to automate your payments so it’s out of sight and out of mind. But if you’re automating student loans, make sure you’re not making this key mistake.

BUILD YOUR SAFETY NET

Once you start paying down your debt and funneling a healthy amount of money into your 401(k) each month, it can be easy to sit back and think you’re set for retirement. And if life goes exactly as planned, you’re probably well on your way. But life can be unpredictable. A car accident, job loss or perhaps a health scare can easily knock your retirement savings off track. Preparing your retirement savings for the unexpected is a critical, but often overlooked, aspect of saving for retirement. Make sure you have health, auto and homeowners or renters insurance. In addition, here are a few additional safety nets to consider:

An emergency fund. When one of those “what ifs” strikes, you don’t want to be dipping into your retirement savings to cover your costs. That’s why it’s important to set aside some money (a good rule of thumb is to work up to three to six months of your total monthly expenses) in a savings account.

Disability insurance. Your monthly contribution to your retirement savings comes from your paycheck. But if you get injured or sick and can’t work for several weeks or more, those retirement contributions will stop (not to mention you might have to dip into savings just to pay for the things you need). That’s where short- and long-term disability insurance comes in. It will replace a portion of your income if you are injured or sick and can’t work for several weeks or more.

Life insurance. When you’re young and single, life insurance may not seem like something you need. But if you’re considering getting married and having a family someday, you’re probably going to want it in the future. Life insurance can protect your family’s financial plan when you’re no longer around. So, you can just wait on this one, right? Well, not exactly. There are a couple reasons to consider getting at least a small life insurance policy now:

• You’re young and healthy. The cost of life insurance (and your ability to get it) is based on your age and health. Given that you’re young and healthy, a policy will typically be less expensive (on a monthly basis) than it will be in the future; all things being equal. But with most policies, you can add to your coverage later even if you develop a health issue that would make it difficult or impossible to get.
• It can provide flexibility. With whole life insurance, in addition to the death benefit (and ability to add to your coverage in the future), you also accumulate cash value. Cash value grows tax-deferred and you can access that money for anything you need throughout life. Long-term, it could help cover an unexpected cost or you could use it for a down payment on a home someday. But — because cash value in a whole life policy is not directly tied to the market, it is not volatile like the market — many people hang onto it and use it to create income in retirement.

ENJOY TODAY

When you have a lot of financial priorities, it can seem like you don’t get to spend any money on yourself today. But financial planning and saving for retirement isn’t just about some far-off goal. It’s about balancing those long-term goals with the things you want today. So, when you’re budgeting what you’ll contribute toward your retirement, debt and other bills, make sure you also set aside some money for fun today.