In the journey of life, preparing for retirement can seem like a distant priority, especially if you’re a millennial focused on more immediate financial concerns like buying a home, repaying student loans, or saving for your children’s education.

Current high interest rates and inflation are also making it harder to put money aside for the future. Despite these headwinds, starting early can make all the difference in securing your financial wellbeing. To help you begin, let’s unpack the essentials of retirement planning for millennials.

Why Millennials Should Prepare for Retirement

Planning early for retirement allows you to invest over a longer term, which can help you manage finances over time.

There are several reasons why this need may be even more pressing for millennials—the generation born between 1981 and 1996:

•  Millennials are falling behind. In the U.S., millennials account for almost 50% of all outstanding student loans, with average loan balances over $42,600. Because servicing this debt can make it difficult to allocate funds to other financial goals, millennials lag other generations when it comes to saving for retirement.
• Social Security may not be a safety net. Based on current forecast and without government intervention, Social Security benefits may decrease by up to 23% as of 2034. This puts a greater burden on millennials to make up the difference by saving in advance.
• Workplace realities are shifting. Many millennials are gig workers, job shifters, and self-employed entrepreneurs, which means they lack access to employer benefits such as pensions and healthcare. This is another factor putting them under pressure to take retirement planning into their own hands.

How Much Do Millennials Need to Retire?

As you get serious about retirement planning, you may be trying to assess how much money you really need to save to manage a comfortable retirement. Not surprisingly, this depends on several factors:

• Your retirement goals. Before jumping into the mechanics of saving and investing, it’s important to define what retirement means to you personally. For instance, if you plan to stop work completely and travel or pursue hobbies, you may need a larger nest egg than if you intend to continue working later in life.
• The age you’d like to retire. While the average retirement age is 65 for men and 62 for women, many millennials aim for early retirement. Reaching this goal requires careful planning.
• Your current age. As of 2024, millennials range in age from 28 to 43. The younger you start to save for retirement, the less you may need to put aside each month. For instance, if you begin saving at age 28, you may be able to meet your retirement goals by investing 15% of your income throughout your career. Conversely, if you begin saving at age 40, you may need to invest a higher percentage of your annual income over time.
• Where you live. In states where housing, healthcare, and/or taxes are high, you will likely need to save more for retirement than in jurisdictions with a lower cost of living.
• Your current retirement savings. Thanks to the power of compounding growth and interest, saving earlier for retirement gives you a longer runway to grow your investments. Similarly, the more you have put aside in savings, the greater those earnings will be. That said, most millennials still have some catching up to do. Based on recent estimates, millennials have put aside an average of $62,600 in retirement savings. A general rule of thumb is to build a retirement account equivalent to roughly 10 times your pre-retirement salary.

Retirement Planning for Millennials: Securing Your Financial Future

•  Grow your net worth so you can free up funds to invest.
• Use those funds to set up an emergency account and contribute to other tax-advantaged savings accounts.
• As your wealth grows over time, work with a financial advisor to structure a retirement plan tailored to your risk tolerance, investment approach, and long-term goals.

Speak to a Wealth Enhancement Group advisor about retirement planning today.

A Guide to Retirement Planning for Millennials

Although retirement may seem far away, planning now can help you gain confidence by giving you time to build your wealth. Following these four steps can put you on the path to creating a retirement plan that meets your needs.

1. Aim for Financial Flexibility

To understand how much money you can afford to invest, take some time to list your assets (e.g., savings, investments, property) and your liabilities (e.g., student debt, credit card balances, loans) so you can take stock of your financial health.

From there, factor in your current income and expenses to create a realistic budget that allows you to pay down debt while also growing your net worth.

As you begin to make more money through both increased earning potential and your investments, you should gain sufficient financial flexibility to put a more structured retirement plan into place.

2. Set Up an Emergency Fund

An emergency fund is designed to help you cover unexpected expenses, like medical issues, family emergencies, or job loss.

Without it, you may be forced to take on high-interest debt or withdraw from your investment accounts, incurring penalties and undermining your long-term plans.

Aim to save at least three to six months’ worth of living expenses in a liquid account (such as a money market fund), where your money is easily accessible.

Once your emergency fund is in place, you can invest with more confidence, knowing you can handle life’s unexpected expenses without derailing your retirement plans.

3. Invest in Retirement Accounts That Offer Tax Benefits

Tax-deferred retirement accounts, like a 401(k) or Individual Retirement Account (IRA), as well as tax-advantaged accounts, like a Roth 401(k) or Roth IRA, are critical tools in retirement planning.

These accounts offer tax benefits that can enhance your savings growth over time. With a traditional IRA or 401(k), your contributions are made with pre-tax dollars, reducing your taxable income for the year.

Additionally, these funds grow on a tax deferred basis, meaning you only pay tax when you make withdrawals during retirement.

For their part, Roth 401(k)s and Roth IRAs are funded with after-tax dollars, so contributions are not tax deductible. On the plus side, however, all future qualified withdrawals are tax-free, making these accounts particularly beneficial if you expect to be in a higher tax bracket during retirement than you are when you set up the account.

Maximizing contributions to these accounts can significantly reduce your tax liability while helping your savings grow through the power of compound interest. Additionally, many employers offer a match on 401(k) contributions, which can further boost your retirement savings.

Ideally, you should aim to contribute at least enough to your employer-sponsored 401(k) plan to receive the maximum match, which is essentially free money that’s part of your compensation package.

4. Work with a Financial Advisor

Retirement planning for millennials can be complex and the right strategy depends heavily on your individual circumstances. A qualified financial advisor can offer personalized advice that considers your financial situation, risk tolerance, and retirement goals.

They can help you navigate complex investment landscapes, optimize your tax situation, and adjust your plan as your life changes.

The Bottom Line

Effective retirement planning is a dynamic process that requires ongoing attention and adjustment.

For millennials, it presents a unique opportunity to fortify their financial future by leveraging time, modern financial tools, and strategic planning.

By starting now and getting the advice you need, you can build a robust financial foundation that will support a rewarding retirement.

If you’d like to learn more about retirement planning strategies, contact a Wealth Enhancement Group advisor.

Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor and affiliate of Wealth Enhancement Group®. Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC.