It’s no secret that most Americans aren’t financially ready for retirement. A recent survey from Northwestern Mutual found that one-third of Americans had just $5,000 saved for their golden years. Thankfully, the average amount that Americans have squirreled away is higher – at $84,821, but that still isn’t enough to cover expenses for an extended period of time.
And those hoping that Social Security will be their salvation need to find a different solution, since estimates suggest that by the early 2030s, the system would be able to pay just three-quarters of the benefits it owes recipients.
The good news (and I understand if you’re wondering how I can use that term after such bleak projections) is that Millennials (unlike their Baby Boomer and Gen X counterparts) still have enough time to make up substantial ground. For those Millennials out there, here are some goals to strive for to help you achieve a better financial future than you may have anticipated. Even implementing a few of these items will go a long way towards securing a strong retirement.
First, pay off the balance on your credit cards every month on time, to avoid paying double-digit interest rates for being late. Second, pay down those old student loans as fast as possible. The interest rates on them are just too high. Take your annual bonus from work or any other windfall and apply it immediately toward paying off all your student loan debt.
You will also need to contribute as much as possible to your 401K plan at work. If you can afford to contribute 10 percent from your paycheck every month, do it. It may mean one less beer or latte per week, but believe me, it will be worth it. Remember that any contributions you make will help reduce your taxable income – a great incentive for saving.
Hopefully your employer has a few good low-fee stock index fund options in their 401K plan to choose from. If you contribute to a 401K every two weeks you are dollar cost averaging your way into the stock market all the time, which is how you can take advantage of down or bear markets.
Reinvesting all the dividends from your mutual funds is also an excellent way to dollar cost average in down markets. Remember, you only care what your retirement account is worth way down the road. An added bonus is that your employer should match at least a portion of every paycheck, which is free money.
If you have any money left over after maxing out your 401K at work, consider opening a Roth IRA and contributing the maximum amount of $5,500 a year. The best thing about a Roth is that when you withdraw this money after age 59½ it is completely tax free, unlike the withdrawals from a regular IRA, which get taxed as ordinary income. This is a huge advantage. At some point in your career your earnings will disqualify you from fully contributing to a Roth IRA, which is limited to those earning $116,000 as a single head of household or $183,000 for married couples. At that point, you can open up a regular IRA and have both retirement accounts.
If you manage to do most of the things on this list, you will be way ahead of the game because your money will benefit from the magic of compounding over a very long period of time.”