The Reality of #MillennialRetirementPlan

Millennials can be a complicated demographic to figure out. They’re better educated than any previous generation (40 percent have bachelor’s degrees), the majority enjoy working (72 percent are employed), they often stick with their employers (50 percent have held the same job for at least five years), and those who earned bachelor’s degrees enjoyed $56,000 in median earnings in 2018.

Yet when it comes to investing, #MillennialRetirementPlan is trending on Twitter and not in a good way. Forty percent of millennials think they’ll have to work past retirement, and even more realize they aren’t saving enough for their golden years. Building a nest egg for retirement is their primary reason for investing.

Rocket Dollar’s own group of millennials – Vice President of Marketing Thomas Young, Marketing Associate Nikki Shear, and Graphic Designer Katelyn Stewart – recently got together to discuss their own financial journeys and share their views on the importance of saving for retirement.

Avoid the financial perils of ‘lifestyle creep,’ and invest aggressively through a retirement account

Millennials often find themselves in a difficult predicament, says Young. On the one hand, it feels good to buy nice clothes, cars, electronics, and even your first house. And it’s always fun to go out and enjoy food and drinks with friends. On the other, though, “lifestyle creep” can negatively affect your personal finances. There’s a delicate balance between enjoying the fruits of your labors and living frugally like you did when in college so you can save some money for retirement.

When millennials cross a certain income threshold and compile enough money in a 401(k), they should consider investing some of those tax-advantaged funds into alternatives that can maximize potential returns, Young says. Alternative investment classes – real estate, private equity, peer-to-peer loans and more -- allow investors to potentially realize higher yields over time, so it’s prudent to use a tax-advantaged retirement account as the investment vehicle.

“When you are making enough to contribute to a retirement account, you absolutely should so that when investment opportunities arise you have a nest egg to draw from. A Solo 401(k) or Self-Directed IRA gives you the financial freedom to invest less conservatively because you have a long time from when you start working to when you are ready to retire. You can invest more aggressively and take bets that can pay off huge when you are older. 

“Having the discipline in your 20s to save and live off 80 percent of what you make rather than 100 will resonate throughout your life,” Young adds. “The financial outcome can be dramatic because the money you saved in your 20s will be working for two decades or more by the time you are in your 50s.”

Strive to live below your means so you can save for retirement

The key to balancing spending on things you are passionate about and building financial strength is to aggressively live below your means.

For Stewart, this means avoiding big-money items such as travel and vacations. Staying close to home allows her to keep more of her money and contribute to a savings account.

Shear, meanwhile, was raised in a large family where her parents valued budgeting and clearance shopping. For her, it’s natural to live frugally.

“As much as I like nice clothes, I can’t bring myself to buy them,” she says. “I got my first credit card this year and bought an Austin City Limits ticket, but otherwise saving for retirement is a priority.  I am young and making good money and the math of compound interest is indisputable. I’m thinking of my future – and I know that when I have children or a mortgage I won’t be able to put money aside as I can now.”

Allocating a minimum percentage of income to a tax-advantaged retirement account allows you to continually contribute and build a pool of funds from which you can make larger investments, such as a down payment on a piece of real estate or equity in a startup.

The advantages of time and interest

Millennials have the advantage of the time to put their money to work. The power of compound interest is their second biggest advantage. 

Saving for retirement is a bit like training for a marathon – the journey starts with one mile. As you continue to work, strive to complete five miles, and by the time you can run 26 miles you might find you’re sitting on a million-dollar retirement account because you had the foresight and perspective to prioritize your savings.