What Millennials Can Do Now to Maximize Retirement Savings
Make the Most of Your Savings to Fund Your Dream Retirement
Many studies and surveys have shown that millennials are . This is because retirement feels like such a distant goal when you first enter the workforce and it can seem like you’ll never get there. However, anyone nearing their retirement age will tell you that time flies, and building a generous nest egg becomes significantly harder when you start later.
There are two important steps to take once you land your first job. Save at least 20 percent of your gross income, and enroll in your company's 401(k) plan. Then let years of compounding work their magic on your nest egg. Even if you can only contribute a little to your retirement plan at first, it’s better than nothing at all. So now that you have the basics in mind, it’s time to focus on developing the discipline and the desire to max out your retirement savings. Here is a 3-step strategy to make the most of your retirement savings and build wealth for your future.
1. Take Advantage of Your Employer’s 401(k) Match
You don’t want to leave any free money on the table, right? Employers who offer to match your contribution will typically do so up to 3-6 percent of your annual salary. Find out how your employer grants their matching contribution and make sure you contribute enough money into your 401(k) to get 100 percent of your employer’s match. So, if you make $50,000 and your boss matches your 401k up to 5 percent, be sure to contribute $2,500 over the course of the year.
2. Fund a Roth IRA to the Max
Why not just put it all in the 401k? Glad you asked. The answer has to do with future tax benefits. Your 401k contributions are deducted from your taxable income in the year you make them. But you do get taxed on that money when you withdraw it in retirement. Conversely, Roth contributions are not tax-deductible in the year you make them.
When you open a Roth, you do so with post-tax income. You will pay taxes on the money going into the account but all future withdrawals are tax-free (including the earnings your contributions have collected over all those years). For the year, you can contribute up to $5,500. In addition, you can borrow the contributions (not the earnings) at any time tax-free and without penalty, if you need to.
3. Increase Your Automatic Contributions as You Advance in Your Career
It’s okay to start small at first, especially with a starting salary. But as your income increases so should your 401(k) contributions. Top off your 401(k) when it makes sense and get as close as possible to the maximum annual contribution of $18,000. Some 401(k) plans offer automated annual contribution increases of 1-2 percent which makes the process a little bit easier. With the automation, you’ll barely notice a difference in your paychecks and you’ll still be paying yourself first.
When it comes to retirement there is plenty of truth to the saying “.” Compound interest makes the biggest difference to those who invest over longer periods of time. And the more earnings you can collect the better chance your nest egg has to grow.
Funding both a 401(k) and a Roth gives you the best of both worlds. You get a tax break and employer-contribution this year from the 401(k) contribution. Then in retirement, when tax rates may be higher, you get tax-free distributions from the Roth. It’s free money coming and going!
Smart. Very smart.