Recently, Forbes published an eye-opening article about the challenges that millennials face when saving for retirement. For those in their 20’s or 30’s, retirement may seem a lifetime away; however, that time will approach faster than you can anticipate. Read on below to find out how you, or your “millennial” aged family member, can curb the sticker shock of retirement investing.
When it feels like your career has only just started, it’s hard to motivate yourself to think about what happens when it ends. However, planning your retirement in your early career years is one of the most financially savvy moves you can make. The one thing that stops most 20 and 30-somethings is that they don’t know where to start, and therefore end up pushing retiring planning into the “things to worry about at a later date” column.
To make it easy, we brought it back to basics and pulled together seven things you should know about preparing for retirement with the help of financial expert Jane Hwangbo. Jane was one of the few female semiconductor analysts covering companies for Wall Street. She then went on to manage multi-billion dollar hedge funds and has now wrapped up her client work to run MissionOverMoney, a site providing free classes for those looking to get better with money. In addition to balancing all of this, she has two children (in second grade and fifth grade). Jane was able to provide insight into the fundamentals of what young professionals need to know about retirement planning.
1. Nearly half of millennials aren’t managing their money well enough to prioritize retirement savings.
Jane cited the investment survey conducted by Franklin Templeton to point out that “four out of 10 millennials said that they don’t have a retirement income strategy in place.” She continues, “They’re paying off student loans or trying to stay out of credit card debt. Many are trying to make ends meet through side hustles and entrepreneurial gigs (not always by choice). The little money they have left over is being allocated to have some fun, such as traveling and having meaningful experiences with friends.”
2. Building an investment portfolio means going beyond your 401(k).
Jane says that the first steps should be contributing to a 401(k) if your employer offers it, and then building up a nest egg in your savings account. For those looking beyond that, however, she says, “I would focus on building an income-producing portfolio of investments, whether it be through real estate or a brokerage account. The key is to bolster your financial independence by creating a passive income stream beyond the money you earn today.”
3. But exploring more investments before growing an emergency fund isn’t the right move.
You can’t have only retirement accounts to back you up — that’s not financially secure. You need to have cash at your immediate disposal. “Many people who have well-paying jobs where they’re contributing to a 401(k) account may not realize that a sufficient emergency savings account should be funded and accumulated first,” says Jane. “You should never be in danger of a cash crunch. If you get into a car accident and find that you don’t have a certain type of collision insurance, you need to be able to cover the expense without pulling from your retirement accounts and paying painful penalty fees and taxes.”
4. You have to figure out what to do with your 401(k) after you leave the job with which it’s associated.
Jane outlines your three main courses of action: “First, you can keep your money at the original 401(k) because you like the benefits, such as the particular investment funds that are available, or low fees. Second, you can roll it over to your new employer’s 401(k) because the options there are comparably better, or third, you can roll it over to an IRA.”
On the subject of IRAs, Jane says they “offer much broader access to mutual funds and liquid partnerships, but the underlying management fees may be higher than a low-cost 401(k), which takes a bite out of the compounding effects of investing early in your career. IRAs are generally more flexible than 401(k) plans if you need to withdraw money as well.“
5. There are creative ways to get aggressive about investing, but you need to be well-informed.
According to Jane, many people get themselves into trouble by investing without having a full understanding of the financial choices they’re making. She also says, “For young people who want to learn how to invest directly in companies, implementation of Title III of the JOBS Act earlier this year enabled individual investors to participate in equity crowdfunding and fundraising for private companies through registered websites.” If you are interested in exploring (relatively new) investing route, Jane stresses the importance of consulting a lawyer (who is familiar with corporate law) beforehand to ensure your investment is compliant with applicable laws.
6. You can’t just choose any IRA option. You need to know the differences between Roth and traditional, at the very least.
Your choice between a Roth IRA and a traditional IRA is at least partially contigent on how much you’re bringing in now, and when/on what sum you want to pay taxes. Many experts have offered different opinions on which to opt for, but Jane says if you are making significantly more now than you will be when retired, a traditional IRA may be a good choice.
For a traditional IRA, Jane says “you make a tax-deductible contribution today while you’re in a higher tax bracket, and then pay less in taxes when you’re in a lower tax bracket while you’re retired. A Roth IRA operates in reverse. You pay your taxes upfront, but in return, your distributions during retirement are not taxed. If you expect to have high taxable income during your retirement years, a Roth IRA may be the way to go.”
7. Your 20s and 30s is the only period in your investing life when time is really on your side.
Jane presents a down-to-earth way of looking at investing in your early career years:
“When you’re in your 20s and 30s, time is on your side. It takes more time than people expect to accumulate the kind of financial arsenal that allows us to be comfortable in our golden years. However, it would also be false to believe that time somehow ensures investing success. It doesn’t. More years only means that you’ll have opportunities to try again. Investing inherently means you are taking a risk. I would embrace the uncertainty.”
This article was originally published by Forbes on October 24, 2016