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Millennials were recently surveyed by bankrate.com about the ideal age to retire. The most common response was 61 years old; which is 4 years earlier than when current social security benefits (fully) start kicking in. The idea of early retirement seems easily achievable because we see people flaunt it all over social media.
Early retirement sounds awesome but it’s not realistic for most millennials unless they start getting smart and disciplined about money.
Nerdwallet calculates that a more realistic outcome for the graduates of the Class of 2018 is a retirement age of 72 (that’s only if they budget wisely).
The financial reality millennials face is not pretty.
Two-thirds of all working millennials don’t have anything saved for retirement.
Millennials who are saving for retirement have a median retirement account balance of about $19k.
A little scary if you ask me…
Dig down deeper, the average millennial is contributing 7.5% of their income to an IRA or 401k. Most financial experts and institutions recommend saving 15% of your income towards retirement.
If you want to retire “rich” — Invest 15-20% of your income for retirement.
Want to retire early? Save at least 20% of income for early retirement.
Contribute to retirement savings early! Most people don’t start until 25.
Someone who contributes $5000 annually, starting at age 22, earning an average interest rate of 7%, will accumulate $953,171.030 by age 59 1/2 (earliest age you can start withdrawing from your IRA or 401K).
On the other hand, someone who starts at age 25 will accumulate $764,031.62 by 59 1/2. That’s a $189,139.41 swing!
$5000 is what the average person contributes to retirement accounts. 7% has been the average return, adjusted for inflation, from the S&P 500 since its inception.
All of this is based on the Warren Buffett strategy of investing 90% into low-cost index funds and 10% into high-quality short term municipal bonds.
Invest your savings into Index funds like the Vanguard 500 Investors Fund Share or the Fidelity 500 Index Fund.
Here is what the picture looks like if you max out your IRA or 401k contribution:
22 year old maxing out Roth IRA contribution at $18,500 per year x earning 7% interest x 37 1/2 years = $3,526,733.80
That’s a lot of dough but not easy or realistic for most millennials to achieve because — 63 percent of millennials have more than $10,000 in student loan debt. Many end up racking up credit card debt or getting car loans they can’t afford to stay afloat.
There is hope. Here are some basic rules to follow and get you there:
1. Pay down high-interest debt.
Your first step should be to prioritize paying down credit card debt, student loans, payday loans, high-interest car loans. Anything that only costs you money without a return.
2. Create a budget
You need a map to achieve any destination. Your life’s budget is part of that map. Write down what money is coming in and going out. Cut the fat and increase the percentage of money you are keeping.
Read my blog post about budgeting
3. Emergency savings fund of 3-6 months living expenses
57% of Americans do not have $1000 of liquid savings available. Don’t be a statistic. After you pay down your high-interest debt, your priority should be to fund an emergency fund. Start by calculating your total expenses per month and save 3-6 months worth of that. Treat it like a rainy day fund because life can change in an instant.
4. Max out your retirement contributions and invest in low-cost index funds
While you are building up your rainy day fund, max out your retirement contributions. The maximum allowed is $18500 per year.
5. Invest at least 15% of your total income into retirement
Saving and investing 15% of your total annual income is recommended by the financial planning community. That can include any employer match you may get. The higher the percentage, the earlier and more comfortable you will retire.
6. Do not buy depreciating assets (liabilities) with high-interest debt
This is kind of a simple one. Don’t by things that cost you money instead of making you money. Especially not with high-interest debt.
7. Use other people’s money to buy assets that appreciate and create passive income.
Instead of buying liabilities, use other people’s money to make you money. Real estate is the first thing that comes to mind. You can earn money from real estate in many ways, but a simple and sustainable way is through rental properties.
Use a mortgage to buy a property and have other people pay down the mortgage while you gain positive equity.
If renting to others is not your thing, look into other methods over leveraging other people’s money to make money in real estate. Another one that comes to mind is flipping homes.
8. Get a good side hustle going
Millennials start their adult lives with financial hurdles like student loans. That’s why it’s a great idea to start a side hustle to pay down bad debt and use the rest to invest in your future. Making money is about vision, discipline, and old fashioned hard work. There are no short cuts and everything in life is earned.
In this world we need dreamers and we need doers. It’s those that can combine both that end up with money.