Posted by Expert Panel.
Millennials already know on a gut level that they need to start saving for retirement. The tricky part is motivating them to actually sacrifice a portion of their first paycheck—for the sake of their 40-years-in-the-future selves.
So, we asked each of our experts what specific advice they would give to someone just starting out in her career.
Saving doesn't have to be painful—it can be an outright pleasure. When you’re first starting out, retirement is the last thing on your mind. Actually, it’s so many decades into the future that putting money aside for it now hardly seems consequential. People often talk about saving in terms of delayed gratification—but what about the immediate gratification of seeing your account grow? Start keeping track of your accumulated wealth, using an app that shows you the real-time value of all your accounts in one view. Sure, spending is fun, but watching your net worth get larger can be enjoyable, too.
Get in the habit from day one. Enroll in your 401(k) or 403(b) during your orientation—before you know what your take-home pay is. That way, you won’t miss the money being channeled from your salary to your retirement plan. Let’s face it, your take-home pay will have other pressing claims on it: paying off student loans, rent, maintaining a certain lifestyle. And remember, $100 pretax would only be worth around $80 in your pay check, depending on your tax bracket. Millennials don’t expect to be in the same job for life, and sometimes rationalize that there’s no point participating in their work 401(k) because they won’t be there for very long. But the funds remain yours, however many jobs you have. Most importantly, you shouldn’t touch that money when you leave, even though cashing it out can be enticing, especially if the balance isn’t very much. Instead, you can roll it over, along with all future 401(k)s, to the same IRA.
Save 10% of your salary—or even just $10 per month—regardless of how much you’re making. The key thing is setting up an account and creating the saving habit early on. That’s easier for some than others. I think it’s really important to know your personality type: Are you a pleasure delayer or do you need to work extra hard to defer gratification? The less conscientious you are, the more you need outside help to get on track, because you don’t have the self-motivation and discipline of the natural saver.
Social Security may not be there for you, but you can do something about that. Young people know they have to put money into a 401(k) for their own future benefit, but how do you transform that abstract understanding into positive action? The future of Social Security isn’t clear, and the 401(k) and 403(b) do not offer lifetime income, like old-school pensions. Up until the 1980s, defined benefit plans were the norm, and workers didn’t even need to think about generating a lifetime income stream for retirement. That’s why young people need to get into the mindset of building a nest egg. And to do so, they need to be aggressive investors, early on.
I was fortunate enough to sit alongside a coworker whose dad retired in his early 50s, and his example made a big impression on me, an impressionable entry-level employee. Like him, I got into the habit of maxing out my 401(k) even though it made a big dent in my paycheck—I simply acted like I was earning less. Nobody likes being told what to do, but if you put this maxing-out principle into place, you can quit being told what to do—in other words, achieve financial freedom quicker.
Start saving right away, even if it’s only $20 a week (which alone would grow to $330,000 by the time a 22-year-old reached the retirement age of 67, assuming a 7% rate of return). When I was that age, I didn’t really understand the power of compound interest. So to help newbies just starting out, I give examples like this. To be eligible for your employer match, you might have to be employed for 6 months or a year, so find out when that kicks in and mark the date in your calendar. As soon as you can get your hands on that “free” money, take full advantage of it.
Your retirement will look a lot different from your parents’. Defined benefit plans, including pensions, are becoming less common. Pay yourself first. You won’t miss what doesn’t appear in your paycheck. Aim for 10% of your pretax salary, and if you can’t manage that right away, at least defer enough of your salary to get you the employer match. Money can be tight in your early 20s, but you need to get into the percentage mindset. Plan to increase that percentage over time—certainly every time you get a raise.