You’ve probably heard from your parents, commercials and that one financially-savvy friend of yours that it’s essential to start your retirement savings early. However, planning for a retirement that’s decades away might sound like a pipe dream when you can hardly imagine a day without student loan debt. Fortunately, there are ways to build your retirement savings from the ground up.
In this blog, we’ll uncover why it’s so hard for millennials and gen z to start saving for retirement. Then, we’ll walk you through how much to save and what you can do to make your retirement goals a reality – whether you dream of traveling the world or retiring to a quiet life on Maryland’s Eastern Shore.
Why aren’t millennials and gen z saving for retirement?
Millennials and gen z have an overwhelming number of financial responsibilities, but there’s one that’s really holding them back from saving the money they need to retire. You can probably guess what it is. It’s the same obstacle standing in their way of homeownership and other major life milestones: student debt.
The average rate of student loan debt in Maryland is over $39,000. That’s the highest of any state in the country. Because millennials and gen z have high rates of student loan debt, they also have a lower wealth to income ratio. In other words, millennials and gen z are spending a larger portion of their income on repaying debt than past generations. That leaves less money available for contributing to a retirement account. This, combined with a rapidly increasing cost of living, has made it harder for millennials and gen z to save.
Another challenge holding millennials and gen z back is the transferring of responsibility to the individual. Whereas previous generations may have received a pension from their employer, millennials and gen z must rely on an Individual Retirement Account (IRA).
Although many employers offer a 401(k) IRA and even match a percentage of contributions, the responsibility ultimately falls to the individual who must take advantage of the opportunity and select their contribution amount. With so many financial responsibilities today, it can be hard to allocate money towards a future that’s decades away.
How much do millennials and gen z need to save for retirement?
With inflation on the rise and student loan payments returning in 2023 , it probably feels like there’s little room in your budget to save money – let alone save for your eventual retirement. However, it really does make a difference to start saving early. And any little bit truly can help.
But how do you determine what to save?
Naturally, there are a lot of factors that contribute to how much you should save. Your current age, your projected retirement age and your goals are just a few of the factors you need to keep in mind.
Here are a few things to consider when deciding what to save:
- Have access to an employer match? Take advantage of it!
- Start as small as you need to, and gradually increase by 1 to 2% each year.
- Get a raise or a bonus? Put those funds towards your retirement savings.
Ultimately, you’ll want to aim for saving 12 to 15% of your income each year. We know that can be a lot when you don’t earn much to begin with. Instead, begin with what you can afford to save, and make it a goal to gradually increase your percentage saved as you advance in your career.
Our financial planning partners can not only help you determine how much to save for retirement but also devise a strategy that fits within your budget. Seek financial planning support with SECU. Both members and non-members can also get a free financial wellness checkup. Our trained experts can help you review your spending habits, so you can start saving for retirement.
How millennials and gen z can start saving for retirement today
Here are strategies you can use to start planning for your future even if you feel like your budget is stretched too thin.
Track your finances
When you’re buying groceries, filling your gas tank and getting charged for an online shopping order you forgot about, it can be easy to lose track of your spending. When saving for retirement, it’s essential that you know how much money you make versus how much you spend.
Make it a point to closely track your spending for at least a month to get a handle on your finances, and see just how much you can afford to reallocate. Use an app like Mint, which syncs all your accounts from credit cards to PayPal, to automatically categorize your spending, or go old school with a spreadsheet. This can help you get a clear picture of your financial situation.
Then, you can find ways to spend smarter. Can you make cuts to one area of your spending and reallocate that money towards savings? Or maybe there are simple lifestyle changes you can make to cut back (like treating yourself to Dunkin’ coffee only once a week). Even small changes can make a big difference over time.
Take advantage of employer benefits
Many employers offer a 401(k), a retirement savings account in which employees make automatic contributions through their paycheck. Any money you contribute towards your 401(k) is not included in your taxable income, which could help you save money on your taxes when it comes time to file.
Another advantage of the 401(k) is that many employers offer a contribution match, generally up to a fixed percentage. If you can afford to, we recommend taking full advantage of your employer match. Your employer’s contribution is essentially free money you can get towards your retirement.
Let’s say you make $50,000 a year. If your employer offers to match your contributions for up to 5% of your annual salary, you can earn an extra $2,500 towards your retirement each year. With your employer’s contribution, you’ve instantly doubled your savings towards retirement.
Saving through a 401(k) is also incredibly simple. Once you sign up, your chosen amount is directly contributed meaning you can essentially set it and forget it – until you’re ready to increase your contribution that is.
Consider a Roth IRA
Unlike a 401(k), contributions to a Roth IRA do not impact your taxable income. However, they do provide other tax benefits. With a 401(k), any money you make through interest will be taxed, and you will owe taxes when the time comes to withdraw your savings. Meanwhile, any money you make through interest on a Roth IRA is tax-free (unless you withdraw funds early, which subjects you to a 10% tax penalty).
Additionally, a Roth IRA can be a great investment if you anticipate you’ll have a higher income when you retire than you do now. Hint: most people do. That makes it a worthy investment for millennials and gen z especially, who typically begin their careers in low-paying entry-level jobs.
By the time you cash out a Roth IRA, you’ve already paid taxes on your savings. Plus, the taxes you pay are based on today’s entry-level income. With a 401(k) you pay taxes at the time of withdrawal, and the amount is based on your income at the age of retirement.
|Who can set it up?||You work with a financial institution like SECU||Your employer|
|Who contributes?||You make contributions||You make contributions, and your employer may match up to a certain percentage.|
|Can you automatically deduct contributions from your paycheck?||No||Yes|
|Can you withdraw funds early?||Yes, but funds are subject to a 10% penalty if withdrawn before age 59 1/2||Yes, but funds are subject to a 10% penalty if withdrawn before age 59 1/2|
|Maximum annual contributions||$6,000 for those under 50 and $7,000 for people 50 or older||$20,500 for those under 50 and $27,000 for people 50 or older|
|Taxes on contributions||Contributions are made with after-tax funds.||Contributions are made with pre-tax funds, reducing your taxable income.|
|Taxes on withdrawals||Tax-free||$6,000 for those under 50 and $7,000 for people 50 or older|
It’s never too early (or too late!) to start saving for retirement.
With SECU, saving for retirement doesn’t have to feel like such a daunting task. We can help you review your current finances, plan for the future and select the best savings plan for your financial goals. Learn more about saving for retirement with SECU. Schedule a free financial wellness checkup to start saving for your retirement.