Business 2 CommunityHow Millennials Can Prepare for Retirement in a Stagnant Economy
The economic downturn has been extremely difficult for millions of Americans. Young adults (often referred to as millennials) have been among those impacted the most. Millennials are struggling with few career opportunities, stagnant wages and crippling student debts. These challenges have made it increasingly difficult for them to prepare for retirement. Young adults need to come up with a plan to address the challenges they face while ensuring they can afford to retire comfortably.
Retirement planning challenges millennials face
It’s been widely reported how baby boomers may be the last generation to experience an increase in standard of living versus their parents. Millennials are no exception and here are some of the issues they will need to deal with.
Massive student loan debt
Young adults are leaving college with record amounts of debt. The average college graduate owes over $29,000 in student loan debt. Recent graduates have difficulty saving for retirement or buying a house when they have to pay several hundred dollars towards their student loans every month.
Few job opportunities
The job market is perhaps the largest challenge millennials are facing. The real unemployment rate for millennials is 15.5%, which is about two and a half times the national average. The underemployment rate is even higher. Millions of young adults are currently working in low wage jobs. As a result, 21.6 million are still living with their parents.
Social Security concerns
A recent survey from Merrill Lynch found that baby boomers expect Social Security and employer pensions will cover 60% of their retirement income. Millennials expect those income streams to account for 28% of the money they receive in retirement.
How millennials can prepare for retirement
Every millennial should have a clear plan to prepare for retirement. Here are some tips that young adults can follow to get on the right track.
Dealing with student loan debts
A 2013 study from NerdWallet found that growing student loan debts will force most millennials to retire in their mid-70s. Young adults will have a much easier time saving for retirement if they find a way to make their student loan payments more manageable. Here are some ways they can deal with their debt:
Pay off highest interest loans first
Take advantage of loan forgiveness programs (such as those available to people working in the public sector)
Setup direct deposit to reduce interest payments
Look into President Obama’s recently signed executive order that caps student loan payments. You may be able to save more money for retirement if you take advantage of this program.
Student loans are a major burden for millions of young adults. You can lessen that burden by paying them off carefully.
Don’t make eliminating debt your only priority
Many people have probably told you to pay off your student debts as soon as possible. Nobody wants to be in debt, but this isn’t necessarily the best advice. If you use all of your money to pay down your student loans then you won’t have anything left to save for retirement.
You need to always consider the opportunity costs of paying your student loans off more quickly. You will be better off making the minimum payments on a student loan with a 5% interest rate and saving the remainder in a retirement account if that account receives an 8% average rate of return. On the other hand, it would make a lot more sense to pay the balance on your credit card if you have an interest rate of 18%.
Always prioritize your financial decisions. I can understand the desire to be debt free, but don’t sacrifice other long-term financial goals in the process.
Focus on more aggressive investing strategies
Recent studies have shown that millennials are risk-adverse investors. One study found that the average millennial only invests about a quarter of their money in equities. They have become nervous about investing in the stock market since the recession, but they need to realize it is crucial in planning for retirement.
John Diehl, the senior Vice-President of Strategic Markets for Hartford Funds, said that millennials will need to invest more aggressively since many of the public funds they are counting on won’t be available to them.
Fund your IRA
Very few millennials are enrolled in employer pension plans, yet they are the first generation that will be almost entirely responsible for their own retirement.
You should have an individual retirement account (IRA) or 401K. You will want to start funding your IRA as soon as possible. You shouldn’t be discouraged if you can’t afford to save a lot. Even investing $30 a month is a lot better than nothing. You should find out if your employer has a matching program, because you will be able to grow your funds much more quickly.
Avoid dipping into your retirement account
Your retirement account can only grow if you don’t draw from it. You will also need to pay a 10% tax penalty for withdrawing from it.
Unfortunately, many millennials are tempted to draw from their retirement accounts when their funds are low. You need to create a reasonable budget that you can stick with. You should also have a three month nest egg so you don’t need to dip into your retirement in an emergency.
Preparing for retirement as a young adult
Millennials are facing a number of unprecedented financial challenges. They will have to make due with smaller social security checks, record student loan debt and few job opportunities. They will also have less assistance from their employers than prior generations.
Young adults will need to be diligent to prepare for retirement. Paying off debt and starting to save are 2 great places to start.
This article was syndicated from Business 2 Community: How Millennials Can Prepare for Retirement in a Stagnant Economy
More Business articles from Business 2 Community:
