9 out of 10 people would say yes without having any idea of how they could get there. However, that’s quite okay; not all of us are worried about the phase of our lives that starts 30 or even 35 years from today. Wait a minute! Could it be the real reason behind America’s retirement crisis? Yes, one of the primary reasons why we hear too often about America’s retirement challenge is ignorance and lack of financial awareness that keeps people from saving for retirement.
The good news is that if you’re 30 or younger, we’ll tell you how to retire a millionaire without having to survive on Mac burgers alone.
Let’s be honest. Young professionals have limited financial responsibilities, and yet we somehow manage to spend it all. A large number of millennials, a growing part of the American population, blame student loans for not being able to contribute towards retirement. America has student debt in excess of $1.5 trillion. While student loan is a burgeoning issue, a little financial advice can do the trick for fresh out-of-the-college professionals. Financial experts suggest shifting to salary-based repayment programs for federal loans. It could free up additional income that you can contribute towards retirement. Do understand that if you’re unable to save 10% or 15% of your monthly income at this age, things are likely to get difficult going forward.
Albert Einstein called compound interest the “eighth wonder” of the world, and we couldn’t agree more. To put it simply, when you save money in a financial instrument that offers compound interest, the interest earned by your capital investment in a given period, say 12 months, is added to your principal at the end of every compounding cycle, usually a year. Therefore, the interest generating potential of your investment grows with each passing year.
Let’s take an example to understand the impact of compound interest on your retirement corpus. John starts contributing $10,000 annually towards retirement at age 25. However, growing financial responsibilities force him to stop these contributions at age 40, which means John contributed a total of $150,000 over 15 years to his retirement plan. Elliot starts contributing $10,000 annually towards retirement at age 35 and diligently does that until age 65. He contributed a total of $300,000 towards retirement.
Who ends up with a bigger retirement corpus?
John. Surprised! That’s the power of compound interest. At retirement, John had $1,058,912 whereas Elliot had $838,019. John’s investments got more time to grow and accrue interest.
Note: We took a 6% interest rate for this calculation.
There is just one simple rule to saving money: Spend less than you make. Unlike the financial gurus have you believe, it’s much simpler to be financially independent during retirement. All you need to do is to save at least 15% of your income and invest it towards retirement. Since your financial liabilities are lower at a young age, your chances of cultivating good financial habits are high. Do understand that you don’t have to sacrifice everything, and we’re, under no circumstances, asking you to pass-on lifelong experiences. Practice a little financial restraint and route that money towards your future.
If you’re not taking the full benefit of employer match-up contributions, you’re letting free money slip out of your hand. The National Institute on Retirement Security found that despite having access to workplace retirement plans, only one-third of the eligible 66% millennials participate in these plans. However, we suggest you find out about the contribution schedule and vesting terms of your employer before making contributions. Understand that a favorable employer match-up contribution plan could add thousands of dollars to your retirement corpus. Additionally, when changing companies, rollover your retirement plan instead of cashing it out. Early withdrawals not only incur penalties from the IRS but have a detrimental impact on your financial life.
We promised to tell you how you can retire with a million dollars. Simple, by saving $9,000 annually, starting at age 30, and investing it in financial instruments that offer 6% annual returns. Do understand that for calculation and simplicity purposes, we didn’t consider inflation, so make sure to grow these savings in proportion to the inflation rate. What’s surprising is how difficult it gets to accumulate a million dollars as you grow older. If you start at age 20, you only need to contribute $4,500 annually whereas, starting at age 40 would require contributions of up to $18,000 to reach the million dollar mark.
Historically, the stock market has maintained an average return of 10%. That’s quite impressive, even after accounting for all the recessions and economic downturns. The key to gain massive returns in the stock market is to stay invested for extended periods, at least 10 years or more. If you start investing before 30, you have at least three decades to see your money grow. However, it is critical to balance your portfolio as you near retirement. An ideal portfolio should change in every couple of years. Make sure to evaluate your portfolio at least once or twice a year, and consult a financial expert when necessary.
Note: The stock market returns do not take into account inflation.
Do you remember Uncle Pete? Well, he retired and is struggling with financially despite the monthly social security checks. A lot many people expect social security to provide for them during retirement, but that’s as far from the truth as possible. The maximum monthly security benefit was $2,788 in 2018 and $2,861 for 2019. ‘Maximum’ is the key word here, as most of the people aren’t likely to reach that figure. You must reach the full-retirement age with qualified contributions throughout your career to get there. People need roughly 80% of their regular income during retirement, which means counting on social security would be your biggest financial mistake.
You’re under 30 years of age and have time on your side!
The most trustworthy way to be financially independent during retirement is to start saving today. Find out how much money you’ll need in retirement and reverse-engineer the amount you need to save every month. After all, you are the only one responsible for your future self.
Share any retirement advice you would give to your 30-year old self!