The current retirement system is actually built for the benefit of the millennial generation. Saving money through an individual retirement account (IRA) or pension plan makes the accumulation of retirement wealth easier and more attainable for millennials, especially given the number of years until they reach age 70 1/2, the age of required minimum distributions (RMDs).
Any millennial with earned income from any source of employment can take advantage of the retirement system benefits. There is really no magic to the process — there are just three simple keys:
Start early. Setting up an IRA for yourself at an early age is crucial. Unfortunately, we all can’t stay young forever. However, taking advantage of your age is actually one of the golden keys that can help millennials retire with real wealth. The reason is that building retirement wealth comes down to the concept of tax deferral. If you opt for a Roth IRA, your qualified distributions will be tax-free during retirement.
Tax deferral is wildly underappreciated. It’s a crucial tax concept and the reason why retirement accounts are such a powerful retirement and investment vehicle. Tax deferral literally means that you don’t have to pay taxes until you start withdrawing funds during retirement. Contributing just a few dollars a day can help you retire comfortably.
Furthermore, the earlier you start saving, the more the concept of compounding will work for you. In the simplest terms, compounding allows for earnings on your gains in addition to your contributions. The more you are able to contribute, the more compounding can work for you.
Check out this calculator to see how much you can earn based on your contributions.
One more thing to consider if, instead of making a pre-tax IRA contribution, you make Roth (after-tax) contributions: All qualified Roth IRA distributions would be tax-free. Roth IRA contributions are not tax-deductible, but for many millennials, the ability to generate tax-free gains on all future account growth is far more attractive than taking a current income tax deduction on the contribution amount. This is something that you may want to discuss with your tax advisor.
Consistency pays off. Making annual retirement account contributions on a consistent basis is a crucial component for millennials to generate retirement wealth. The amount of contributions and types of investments made are not as important as being consistent in making retirement account contributions on an annual basis. Even just a few dollars a day invested in a conservative mutual fund can generate real wealth for millennials.
Trust the process. Stay patient, and you will have a front-row seat to watching your tax-deferred or tax-free wealth grow. Fans and players of the NBA Philadelphia 76ers have made the slogan “Trust the process” famous over the last several years. The slogan originated in response to an innovative strategy designed by former general manager Sam Hinkie around the premise of losing games and taking the difficult and necessary step of sacrificing short-term gratification for long-term success.
A warning to millennials: This strategy is not an overnight get-rich scheme or even a 12-month get-rich program. Generating real retirement wealth will take some small financial sacrifices and consistency over many years. The good news is that the sacrifice is not difficult or life-altering. This third key is probably the hardest, because trusting the process will not take just a few months but can take upward of 30+ years in order to really maximize the power of tax-deferral and compounding returns. The key is that one needs to start the retirement saving process early and keep it going as long as possible.
I am not telling anyone not to go to Starbucks or go for dinner or even get a new car or go on vacation. All I am saying is to think about the three keys above. Four dollars per day in a Roth IRA starting at age 24 and going through 70, with a 7.5% rate of return, will lead to $561,833. That’s $67,160 of contributions that will turn into over half a million dollars tax-free.
Saving for retirement is not only for the middle class or the rich. For millennials, following the three keys above to the best of your ability can make a life-changing financial difference down the road when you are ready to retire. Use your age and the number of years you have left until retirement to let your hard-earned money work hard for you. The earlier you can start putting aside money for your golden years, the sooner you can start sipping cocktails on the beach.