Retirement savings – or 401(k) savings – are on the mind of Millennials more than they were on the minds of previous generations. Roughly 72% of Millennials are currently saving for retirement, and the median age when they begin is 22. Generation X, on the other hand, began saving for retirement at a median age of 27.
Not only that, but the increasingly stable economic picture that spurred a big increase in the last several years has Millennials thinking ahead. Sixty-four percent more people between the ages of 18 and 34 are saving for retirement now than they were in 2013, according to a Bank of America survey of its clients reported by CNBC.
So, Millennials know how important it is to save for retirement. The continued existence of Social Security as a cushion in retirement is far from certain. The rising cost of living means that Social Security cannot be relied on to fill the retirement bill. Many Millennials know that from looking at grandparents and relatives who are now retirement age and are having to work to supplement their Social Security.
Here are some tips about retirement savings via 401k plans for Millennials.
401ks Allow You to Save Tax-Deferred
First, 401ks are a great retirement savings vehicle if you have access to them. They require employer sponsorship, but a large percentage of employers offer them. They allow you to save tax-deferred. You choose how much you want to save by electing a certain percentage of your paycheck. Percentages vary, but most start at one to two percent and go up to around 10 percent. Some companies allow you to save much more.
The percentage is taken out of your paycheck pretax, so your savings compound tax-free. You will be taxed when you take money out at retirement but only then. Compound tax-free savings grows much faster than compound taxed savings.
Many Corporations Offer Matching Contributions
Check and see if your company offers matching contributions. If they do, the percentage you have chosen is contributed, or matched, by your employer, making the savings even greater. If you have 10 percent taken out of your paycheck for a 401k and your salary is $65,000 per year, you are saving $6,500 per year.
If you have a matching 401k, your employer will also contribute $6,500 per year, making the total you save for retirement $13,000 yearly. It’s like getting extra money every year.
Plan for Your 401k Investments
All retirement savings need an investment plan. Familiarize yourself with what’s available to invest in. The choices are usually stock — like mutual funds or company stock, for example — and bonds. You need to assess your risk tolerance to make sure you are comfortable with your investments.
Many advisers feel that young people do best with stocks because they have enough working years to recover from any bear markets. Over time, the U.S. stock market has returned at the highest rate. It is subject to down periods, of course, but recovers and goes higher.
It’s wise to diversify between different types of stocks and bonds. Some stocks, such as those of small companies, are riskier than others. It’s prudent to talk to an investment adviser about the merits of your 401k investment options.
Use Automatic Enrollment
As you choose among investment options, take advantage of automatic enrollment. Automatic enrollment takes the money for retirement savings out of your paycheck, so it eliminates any desire you might have to not save in a particular period. It also allows you to change the individual investment allocations very conveniently and easily.
Have Non-Retirement Savings Plans
Millennials are subject to big expenses. Many have high levels of student debt requiring repayment, for example. Millennials may be saving for purchasing a home and starting a family. As a result, the temptation to withdraw your nest egg from a 401k plan might be, on occasion, very strong. Don’t! Withdrawals before you are 59½ are subject to a penalty of 10 percent in addition to tax withholding.
The better plan is to save for specific big ticket items, like a house, with a dedicated savings plan. It’s also a good idea to have three months’ worth of salary put away in case of emergencies, like a layoff or a major car repair.
Don’t Neglect IRAs
Individual retirement accounts (IRAs) are another kind of retirement plan. Regular IRAs are also tax-deferred. Roth IRAs are a specific type that allow you to put in taxed income. The benefit of Roth IRAs is that you will not pay taxes when you draw out the funds at retirement.
People can have both. If you are serious about saving the maximum for retirement, have both a 401k and IRAs. IRAs can be self-directed, which allows you to invest in any stock, mutual fund, or bond you want without your company having to choose it as an option.
Millennials are saving for retirement at a high rate. A 401k plan, which allows tax-deferred savings and potential employer matches, is a great way to save. Investors in 401ks should make an investment plan and stick to it, while not neglecting non-retirement savings and other retirement plan methods.