When you’re fresh out of college and just getting started on the path towards a career, retirement savings may fall fairly low on your list of priorities. Many of today’s twenty-somethings are too busy struggling to find their place in an ultra-competitive job market and dealing with overwhelming student loan debt to give their golden years a second thought. While retirement is still decades away for the millions of millennials out there, it’s never too soon to start planning ahead. If you’re a member of Generation Y, here’s what you need to do now to get a jump start on your building your nest egg.
Find out now: How Much Do I Need to Save for Retirement?
1. Learn to Budget
While more colleges and secondary schools are taking steps to educate young adults about the ins and outs of finance, understanding how to make a budget is still a foreign concept for many people. Sitting down with all of your bills and figuring out how you plan to spend your money each month is one of the smartest things you can do for your finances.
Getting started with budgeting is fairly straightforward. You simply compare your monthly income to your expenses. If you’re earning more than you spend, you’re already a step ahead. If you’re constantly in the red, it’s a sign that you need to start cutting back. Getting a budget in place and sticking to it may not seem like it has much of an impact on your retirement but if your money’s going out as fast as it comes in, it makes it nearly impossible to start saving.
2. Don’t Miss Out on Free Money
Participating in your employer’s retirement plan should be a no-brainer. Not only does it give you the opportunity to sock away part of your income on a tax-advantaged basis but you can also beef up your savings even more by taking advantage of a company match. If you’re not contributing to the plan or you’re not putting in enough money to qualify for the match, you’re effectively turning down free money.
For 2015, workers could stash up to $18,000 in a 401(k), 403b, 457 account or similar employer-sponsored retirement plan. If you haven’t signed up for a retirement plan through your workplace, you could be missing out on a significant chunk of change each year.
3. Supplement Your Savings
While a 401(k) or similar plan is an excellent way to contribute to your retirement savings, millennials should also be aware that there are some additional saving options available. An individual retirement savings account or IRA allows you to set aside money beyond what you put in your employer’s plan while also scoring some tax benefits.
There are two basic types of IRA to consider: a traditional and a Roth IRA. With a traditional IRA, contributions are made with pre-tax dollars so you won’t pay any taxes on the money until you start making qualified withdrawals. A Roth IRA is funded with after-tax dollars, which means any qualified distributions are tax-free when you’re ready to retire. For 2015, you could put an extra $5,500 into an IRA, which can give your retirement savings even more of a boost.
Related Article: Which Type of IRA is Right for You?
4. Dump Your Debt
While the 2009 CARD Act made it harder for young adults to get credit cards, it’s still relatively easy for millennials to fall into the debt trap. Whether you’re carrying around student loans, credit cards or a car loan, getting rid of all the extra payments is paramount to how successful you are when it comes to saving for retirement. The longer you let the debts hang around, the more money you’ll be throwing away on interest and the less you’ll have to put away for the future.
The key to getting rid of your debt once and for all is having a plan to pay it off. Some experts recommend tackling the debts with the highest interest rate first while others advise starting with the smallest balances. Whichever route you choose, the most important thing is that you’re able to stick with it until the debt is gone for good.
5. Get Educated
You don’t need a degree in finance to understand the ins and outs of investing and the more you know about how the market works the better. Even if you’re not comfortable buying and selling stocks on your own, familiarizing yourself with the different types investments can help you make smarter choices when it comes to your retirement plan. The money you put in a 401(k) or IRA will certainly add up over time but you have a better shot at maximizing your returns if you’re willing to research your investment options beforehand.
Check out our 401(k) calculator.
6. Don’t Leave Your Retirement Savings Behind
Unless you’re extremely fortunate, your first job isn’t likely to be your last. According to the Bureau of Labor Statistics, the average person holds approximately 12 different jobs throughout their lifetime. If a career change is in your future, you need to make sure you’re taking your retirement savings with you when you make the switch to another employer.
The easiest way to hang on to your cash is to roll the money over into another qualified retirement account. If you have your employer transfer the money directly to your new account, you won’t have to worry about paying any taxes on your savings. Think twice before you simply cash out your old 401(k) since you’ll have to pay income tax on the money, along with a 10% early withdrawal penalty.
Today’s economic climate has made planning for retirement more challenging but it’s not an impossible goal. The main advantage millennials have is that time is literally on their side and the sooner you get started on your retirement savings, the bigger the payoff will be.
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