Millennial to Millionaire: The Effects of Saving From an Early Age
Point of Interest
With time on their side, millennials can leverage classic investment mediums and newly created account types to grow their retirement savings toward $1 million.
If you were born between the years 1981 and 1996, you’re probably aware that society has dubbed you a millennial. What’s great about being in this age bracket is you still have significant time to grow your retirement savings and toss in the proverbial work towel as a millionaire. Currently, the oldest millennial still has two and a half decades to start saving for retirement at the traditional age of 65.
Millennials have several savings options to choose from and leverage to grow their wealth into the seven-figure bracket. While some of these options have been around for decades, many are newer tools that older generations did not have access to.
Millennial savings options
When building wealth and saving for retirement, you’ll want to maximize the two biggest advantages available to millennials — time and investment options. Millennials have access to classic retirement savings accounts like 401(k)s and traditional IRAs, but they also have access to new types of accounts like Roths and target-date funds. Coupling these options with the powerful effects of compounding over time, and you can set yourself up for savings success.
Taking advantage of compounding
Before looking at the unique investment options available to millennials, you’ll want to understand the importance of investing early. As a millennial, you currently have somewhere between 26 years and 41 years until the traditional retirement age of 65. With at least two and a half decades at your disposal, time is still on your side.
Compounding is the ability to earn more money in future years based on past earnings. For example, if you earn 10% a year on a $100 investment, you’ll make $10. However, next year, you are going to make more than $10. Your starting balance is $110 now, which means your 10% return will be $11. This is compounding, and when extrapolated out over the course of 26 to 41 years with amounts larger than $10, the effects can be massive.
For example, let’s say that you have $5,000 to start investing in your retirement account. Let’s assume you are the oldest in the millennial age bracket and have 26 years left until the traditional retirement age. We’ll also assume you are going to earn an average 6.5% return on investment on your account, which is around the historical average of most retirement accounts.
If you’re able to contribute $5,000 annually to your account, you will have $364,991 by the time you reach retirement. If you’re able to bump that contribution up to $7,500 annually, that number grows to $534,634. For millennials at the younger end of the age bracket with 41 years left to save, $7,500 in annual contributions gets you a little over $1.5 million by retirement.
For many millennials, the almighty dollar is not the only deciding factor when choosing where to invest. ESG investing is the process of choosing investments based on the potential value of the company, while also weighing the company’s environmental, social and governmental conscious. In other words, you choose to invest in companies that you morally support for doing the right thing in the world.
Technically, this form of investing has been around since 2004 but has grown in popularity in recent years.
Roths and target-date funds
As mentioned, millennials have all of the traditional forms of retirement savings mediums they can leverage to try and grow their savings to the million-dollar mark. But they also have access to some new types of investments that were not around prior to the 1990s.
The first of these account types are Roths, which include Roth IRAs and Roth 401(k)s. These accounts first became available in the late 1990s and allow users to pay income tax on their invested funds now so they can withdraw them tax-free at retirement.
The second type of account that became available in the early 1990s is a target-date fund. These mutual funds allocate risk based on how long you have until you want access to the money. The further from the target date, the more risk the account manager will accept to give you the best chance at getting higher returns. As your retirement gets closer, they will shift towards less risky investments to lock up the profits.
For example, a millennial born in 1990 would traditionally be retiring around the age of 65 in the year 2055. You can get a target date fund that matures in 2055 that will automatically adjust the risk of the asset allocation to best meet those needs.
Whether you’re successful at saving a million dollars for retirement or not, you will probably be interested in stretching your money as far as possible. There are several strategies to get more utility out of each dollar a millennial has saved.
One of these strategies could be altering how and when you retire.
“Stretching retirement could be something like a phased retirement, where you work less and less as time goes on. And finding work that fits with how you want to live,” says Michael Kothakota, a Certified Financial Planner and CEO of Wolf Bridge Financial. “So maybe your high paying job gets you to save, but once you are on a good glide path, switch to something that may pay less, but be more fulfilling.”
In past generations, retirement was a hard and fast stop. You worked one day, and when you retired, that was it. But as the availability of part-time work and the gig economy continue to grow, millennials have the ability to find work to slowly phase through the retirement process. For active millennials, they may choose to continue this smaller work commitment well past the age of 65, which would be a considerable influence on how far your saved funds go.
Millennials should also plan to run a full review of their budget as they start to approach retirement. Many programs and options exist for retirees to save that you may not be aware of. These include discounts at stores, medical savings programs, food assistance programs, and more. If you can correctly separate what you need and what you can do without, your savings will help to extend much further through the duration of your retirement.