Millennials’ Survival Guide to Retirement

If you were born between 1981 and 1996, you’re lucky enough to call yourself a millennial! And though everyone seems quick to judge this game-changing generation, they are set to become the largest living American generation since the venerable baby boomers.

Through every text, tweet, like and share, Millennials are augmenting the way the entire country works, communicates, and feels. Of course, being this impactful and intriguing means that millennials also find themselves under a microscope.

Let’s face it, millennials do things differently than the rest of Americans. They have “gigs,” spend the most on ride-sharing services, dine out often, splurge on fitness, and research shows, would much rather text than exchange words.

With the world as their oyster and technology easing their task burden, millennials are the most confident working generation, according to several studies.

And while the soon-to-be-largest generation is still relatively young, retirement plans are already taking shape. Those plans may simply include opening an IRA (individual retirement account) or as involved as setting timelines, computing income needed for life after work, and compiling details on how to grow their nest egg appropriately.

Unfortunately, even with good intentions and all the technology in the world, young consumers can easily underestimate the real costs of retirement and what’s needed to get there. Worse still, many may be sabotaging their long-term needs with their short-term wants.

A recent study sponsored by E*TRADE revealed several alarming trends among millennials that, according to experts, could derail their retirement plans. The good news is that we’re offering solutions to these potential pitfalls to make the path to retirement easier.

Shift From Spending to Saving

With the economy and stock market in record territory, registering nearly a decade of growth between them, younger millennials have been fortunate to experience mostly good times during the majority of their teenage or adult lives. Consequently, this long stretch of “good times” may also lead to a false sense of confidence.

Whether due to confidence or necessity, millennials are dolling out record amounts on education and dining out, with many spending tens of thousands a year on fitness and ride-sharing services alone – the most of any generation.

Despite their splurging on everything from Uber to craft beer, they are not splurging on their retirement. E*TRADE’s StreetWise survey showed the vast majority feel confident they will have sufficient funds for retirement when the time comes and are taking the necessary steps to get them there.

This all sounds great, but further survey data revealed a dearth of savings contributions and an underestimation of funds needed to retire comfortably.

The key takeaway here is first to talk to an investment professional or, at the very least, use a reputable retirement calculator or guide to help determine just how much savings you’ll need to have at retirement and how much you’ll need to put away each month or year to get you there.

Align Your Goals With Reality (and Inflation)

Eighty-nine percent of millennials believed they would have enough saved to enjoy retirement – unfortunately, many are wrong.

Those surveyed thought a nest egg between $250,000 and $999,999 was enough to carry them through their golden years. The reality is that even retirement costs are likely to increase, and inflation can take a chunk out of your savings value.

While there isn’t one magical amount of savings one needs to retire, AARP notes that somewhere between $1 million and $1.5 million is a good place to start. That number will vary greatly depending on where and how you live – but don’t expect less.

Perfectly projecting the cost of living 20 or 30 years from now may seem difficult, but you can use average inflation rates, investment returns, and time in retirement to calculate a range for your retirement stockpile.

For example, to generate $40,000 per year for 30 years, one would need $1.18 million – assuming 6% interest and 2.5% inflation – according to Chicago-based investment firm Morningstar.

Keep in mind that $40,000, when you retire 30 years from now, will not be worth the same as $40,000 today, and real data show people 65 and older are spending closer to $50,000 a year currently.

Don’t Confuse Your IRA With a Regular Savings Account

If you’re already contributing to an IRA or 401(k) retirement account, balances can start to add up quickly – but you must remember that retirement funds are not supposed to be like savings accounts.

We all have unexpected expenses that pop up from time to time, but tapping into your IRA or another retirement account for cash may be the wrong way to address the near-term money crunch.

First off, most early IRA withdrawals, with just a handful of exceptions, come with a penalty of 10%. So right off the bat, you’ll need to account for that payment to Uncle Sam. In addition to the penalty, you will have to pay income tax at your personal tax rate. So if you’re making around $35,000 a year, expect to pay another 12% for a total of 22% in federal taxes alone.

Despite these tax consequences, 59% of millennials made an early withdrawal from their retirement account.

What’s more disturbing is that this early withdrawal trend is on the rise, almost doubling since E*TRADE began this survey less than four years ago.

To keep your retirement money growing, professionals advise continuous contributions to your retirement accounts – only withdraw if absolutely necessary. And if you are experiencing a cash crunch, it may be more cost-effective to explore personal loan options rather than dip into your nest egg.

Save as Much as You Can – and Be Realistic

Data also showed millennials were reluctant to follow their own advice.

Even though 44% of young Americans advised others to sock away 6-10% of their income for retirement, much less than half allocated that much for themselves. And even that minority is falling short of the 15% savings allocation recommended by industry professionals.

The good news is that other people want to help you retire.

An employer 401(k) contribution match is as close to free money as you can get. E*TRADE noted, “It is probably the easiest way to seriously kick-start long-term investing.”

Professionals also recommend contributing the annual maximum ($5,500 for those younger than 50 and $6,500 for those aged 50 and over) to an IRA to best leverage these tax-advantaged accounts.

Millennials are in a unique spot in time. Many came of age at a time when technology was completely changing how we live and interact with one another. The staged and filtered lenses of social media posts can make everyone’s life seem envious, but recent data show that less than 20% of people believe they are living the American Dream.

The bottom line is that it’s never too late to start saving, ask questions, or take meaningful steps to attain your version of the American Dream.