Top 5 Millenial Tips for Retirement
While working on our latest idea at Madrona Venture Labs, I had the opportunity to dive deep into the financial technology space and one problem I found really interesting was the amount of millennials who hadn’t started or even thought of starting to plan for retirement.
Millennials in particular have an aversion for traditional financing services like wealth advisors. While I think this is smart because many wealth managers aren’t always correctly aligned with your financial plans, I do think with a little research you can do it yourself fairly effectively.
WARNING: I’m not a financial advisor or licensed to give professional financial advice. Below is just what I’ve learned over time and thought may be useful to put on paper.
Compound interest is king. The formula you need to know is A = P(1+r)^t. Assume I have $10,000 I want to invest so P=10000. The stock market returns around 7% annually on average so r=0.07. I’m 31 now and full retirement age for me is 67. I have 35 years to grow my money before retirement so t=35. Plugging these values in, I’d have my $10,000 plus an additional $96,765 if I invested now and waited 35 years. So if I start investing now I can 10x my money on retirement. In 10 years or t=10, I’d only double my money which is why starting early is critical.
Don’t put all your cash in a savings accounts or money market funds. The current Bank of America savings account interest rate is 0.02% vs. the market long-term average annual return rate of 7%. Using the above example if I put my money in a savings account I’d have made $70 over 35 years. Yes, I realize this is no risk vs. the market, but it is also no return and doesn’t outpace average annual inflation at 3.22% either, so you’re actually losing buying power.
Invest in low cost index funds - not individual stocks or mutual funds. High expense ratios kill returns and picking individual stocks to beat the market is really, really hard. I can usually cover the market with 3 stocks and I typically choose Vanguard, because of the extremely low fees.
Invest for the long haul. Timing the market is impossible. How much time your money is in the market is more important than buying when it’s low. Dollar cost averaging can smooth out the rough patches (buying equities on a set schedule like purchasing $1,000 worth of stocks once a month). So you have no reason not to start today.
Invest in tax-deferred savings accounts like 401(k)’s and/or IRA’s (I’ll write another article on the different types). This allows your money to compound tax-free which can save you a lot of money so max out the contributions if possible. If your company offers a 401(k) you can put a maximum of $18,000 in it and many companies offer a matching program which you should always max out and take advantage of - it’s free money. IRA’s have a lower limit with a maximum cap at $5,500 and as long as your are under the income limit you can actually contribute to an IRA and a 401(k) for double the tax savings.