Millennials got the short end of the stick when it comes to starting their careers. Student debt is at an all-time high, and the Great Recession delayed career growth for many individuals, with millennials just beginning theirs.
It makes sense that many millennials have put thoughts of saving for retirement aside, as they continue to develop careers and make ends meet. Who’s to say retirement will be an option the way it was for previous generations? This burden is affecting many people across the nation, but saving consistently, even a little at a time, is essential to have money set aside for retirement.
Starting early is key to saving more money for your retirement, if you keep it consistent. It’s something many people fail to do.
During your 20s and 30s, you will experience many transitions that will make retirement savings the last thing on your mind. You’ll be preparing to buy a house and start a family, as well as navigating health policies, life insurance policies, mortgages and college funds.
Yet, many millennials fail to recognize that retirement savings can be an asset in the now, also. Capitalize on your time, and invest in yourself. Set aside money into a Roth IRA, which is tax-free as a retirement account, and let compound interest and time build that nest egg.
Whether it’s $1,000 or $5,000 that you place into your Roth IRA, over the next 40 to 50 years, that money will compound. You could have several hundred thousand or more when you retire, if you keep at it.
Sign up for the Roth IRA
The big benefit of a Roth IRA is getting tax-free withdrawals upon retirement. However, you will pay taxes on the money you place into the account, and Roth IRAs are income-restricted.
This doesn’t affect the fact that what you do contribute to your account will grow over time with compound interest, as the money inside the account grows tax-free. Future tax rates only affect your yearly contribution, not the money in the account.
Traditional IRAs do provide a tax deduction, but if you’re a millennial in a lower tax bracket, this isn’t your best choice. You’re basically deferring what you pay until later, and you don’t want that for your retirement. Aim for tax-free and sign up for the Roth IRA.
Dipping Into Retirement Funds Early
Congratulations to those who have started their retirement savings at an early age, but you may be tempted to make a retirement mistake. What’s taking out a little retirement money now to help you get by? After all, you intend to replace it, of course.
Dipping into your retirement funds early is counterintuitive and counterproductive. The good thing about a Roth IRA is that you have penalty-free access to your account, but if you treat it as an emergency fund, there won’t be savings left for retirement. Let retirement savings become a habit, and develop an emergency fund instead.
Among one of the many transitions you’ll make throughout your life are career changes and not staying at the same job for decades. In the switch, you may forget you have a 401(k) or opt to cash it out. This is a big mistake for your financial future.
While that $1,000 or $5,000 in your account may look trivial, it’s not. If you withdraw it now, you will face a penalty for withdrawal and have to pay taxes. Convert the funds to a Roth IRA instead, to avoid penalty and let the interest compound over time. You will no longer be dependent on a savings plan provided by your employer.
Remember, it’s small steps and not big leaps that will get you to a solid savings in retirement. Do what you can. Start saving now and open a tax-free Roth IRA, letting the interest grow over time. Avoid withdrawing money for emergencies from your retirement account or cashing out your 401(k).
Though retirement is last on your list, it shouldn’t be. Saving in the present is one small step for your finances now and one big leap for when you’ve arrived at a secure retirement future.