Thrifty Thinking: Retirement Tips for Millenials

A new study by The FINRA Investor Education Foundation's, The Financial Capability of Young Adults—A Generational View paints a bleak picture when it comes to millennials and displaying low levels of financial literacy. Many millennials express concerns about their debt and it is becoming increasingly difficult for young investors to be engaged in their retirements because simply put, they just don’t understand financial material.

A majority of Millennials are concerned they have too much debt which is slightly less but on par with gen Xers – but much higher than baby boomers. Millennials have been engaged in costly non-bank forms of borrowing in the last five years more than ever such as using pawn shops and pay day lenders.

The private retirement system is not working for Americans of all ages, but it is especially failing Millennials. As for Millennials, not only are they not saving for retirement, but most of them do not even have a retirement account available through their jobs. This massive under saving for retirement threatens Millennials’ long-term economic security and limits their job opportunities in the short term as older workers are forced to stay in the workforce longer instead of retiring. The number of workers who have access to a retirement plan at work has declined over the past several decades. Saving early is a critically important step for a secure retirement, as early investments have the most time to experience the power of compounding interest and maximizing savings.

Below are some steps that Millennials should think about to help them get ready for their retirement.

1) The earlier in the year you make your IRA contributions the better!

Don’t wait till the end of the year to make your contributions. Why? Simple. Compounding returns. When you put money to work for you sooner, you let the power of compounding make a bigger contribution to your retirement investments. Let your investment returns build on each other each month and watch your IRA grow.

A quick example of this is with an initial investment of $10,000 with over 30 years  of compounding would equate to over $100,000 versus a similar investment over only 20 years compounding equating to over $30,000.

(*assume an average annual return of 8%, compounded annually.)

2) Don’t stress about the Taxes

When it comes to your retirement savings don’t stress about the taxes. The money you put in your traditional IRA grows tax-deferred, and the money you put in your Roth IRA grows tax-free. This means if you are comfortable with the risk, you can invest in aggressive growth investments and not worry about capital gains taxes.

Some investors may be apt at an aggressive investment strategy. If so, a properly set up retirement plan is a wise place to hold those assets, which under normal circumstances might generate annual tax bills. When you begin receiving distributions at retirement age from a traditional IRA, you will pay normal income tax at your then marginal rate. Roth IRA distributions won't be taxed at all.

And remember, a taxpayer may always convert their traditional IRA to a Roth IRA if it is more advantageous, but should consult their tax advisor before doing so.

More about Jordan Niefeld:

Jordan works for Gerstle Rosen & Goldenberg, P.A.,  which has maintained its reputation for excellence and client satisfaction in the areas of accounting, auditing, taxation, divorce and fraud forensic, business consulting, governmental, not-for-profit, litigation support, other real estate and construction accounting, as well as federal, state and local governmental accounting, auditing, and consulting services.