How Millennials Can Rescue Their Retirement

With rising costs and decades-long wage stagnation in the United States, saving for and affording retirement is challenging for all Americans — and millennials are no exception. A combination of student loan debt, the hot housing market and inflation have made saving for retirement a tall hurdle for millennials. However, they can still find their financial footing and move toward a well-funded retirement account. Here’s how to rescue your retirement, especially if you were born between 1981 and 1996.

For help managing your financial future, consider working with a financial advisor. 

The Retirement Landscape for Millennials

First, it’s helpful to examine the factors millennials face when preparing for retirement and managing finances. Although they’re the most educated generation – Pew Research reports about 40% of millennials have a college degree – they also have taken on more student debt. The Center for Retirement Research at Boston College’s 2021 study indicates 40% of millennial households ages 28 to 38 carry student debt worth over 40% of their annual income.

With the uncertainty of the Biden-Harris administration’s student loan forgiveness proposal, millennials might be looking at years or decades of remaining student loan payments. This debt makes it harder to save for retirement.

Social Security benefits are on similarly shaky ground. For instance, the Social Security Administration’s 2022 Annual Report stated the institution will be unable to provide full benefit payments to citizens starting in 2035. Though most experts don’t expect Social Security to just go away, even the fact that it could be in trouble adds to younger workers stress about retirement,

Likewise, retirement savings vehicles are different for millennials than for past generations. For example, the National Institute on Retirement Security reported that because employers generally don’t offer pensions anymore, younger workers have less access to guaranteed monthly income that won’t run out. This dynamic leaves millennials with the task of constructing their own retirement savings plan that they (hopefully) won’t outlive.

Lastly, in early 2023 inflation was about 5%, well above the U.S. central bank’s 2% target. Such an elevated level leaves a big dent in consumers’ well-being and weighs on corporate profits.

How Millennials Can Rescue Their Retirement

With that said, millennials have several advantages at their disposal, including higher incomes than past generations. Here’s a roadmap to how millennials can rescue their retirement:

Start Saving Now

Millennials have time on their side, so every dollar saved now will be worth exponentially more in the future. So, use compound interest to make the decades before retirement work in your favor.

The key is to start immediately. For instance, saving $200 per month for 30 years (assuming 8% interest) results in over $309,000. On the other hand, saving $350 a month for 20 years returns about $211,000 (you can project your investment income with this calculator). As a result, putting money away now can grow your nest egg by tens or hundreds of thousands of dollars.

Take Advantage of Tax-Advantaged Accounts

Next, consider which tax-advantaged accounts make sense for your situation. If your employer offers it, a 401(k) is an excellent retirement savings vehicle that lowers your taxable income during your career. Because your retirement income will likely be lower than your working income, you’ll pay less income tax per dollar during your golden years.

Likewise, an individual retirement account (IRA) can play a critical role in your retirement plan. IRAs come in traditional and Roth varieties, so you can choose which suits you best. Traditional IRAs use pre-tax dollars like 401(k)s, meaning you pay taxes when you withdraw money. Contrastingly, Roth IRAs use dollars the government has already taxed, meaning your withdrawals won’t incur a penny of taxes in retirement. A potential downside to IRAs is the low contribution limit ($6,500 for 2023), so you’ll have to supplement this account with other savings.

If you’re a small business owner, you can open a simplified employee pension IRA (SEP-IRA) for tax-deferred retirement savings. The account offers a generous contribution limit of $66,000 for 2023. The disadvantage is that you must contribute the lesser of 25% or $66,000 to each of your employees’ plans as well.

Get a Raise

You can increase your pay from your day job in multiple ways. First, you can simply ask for a raise. If your performance has been stellar and it’s been a while since your employer boosted your pay, plan your approach and negotiate confidently. Likewise, you could aim for a promotion if it’s available at your job. In addition, you could obtain a certification related to your job. Professional courses can train new skills, giving you an avenue for higher pay.

Start a Side Hustle

There are limitless options for a side hustle. You could start your own business, put your extra hours into the gig economy or monetize a skill or hobby. Whether you become an Uber driver, wait tables or start a blog, a side hustle can provide over $1,000 of monthly income. Plus, if your side hustle creates passive income, such as online content or real estate, you’ll continue earning money without pouring hours into it in the future.

Change Careers

Unfortunately, some career paths don’t result in massive paychecks. If you’re struggling to make ends meet, it may be time to turn your sights to a different industry. It also doesn’t have to cost anything to make a change. For instance, The Odin Project provides free resources to teach yourself to become a web developer.

Rent Out Your Home

If you’re a homeowner with a guest room, you could earn hundreds of dollars per month by renting it out. Remember, it’s a good idea to write up a contract and familiarize yourself with state and local housing laws if you do so.

Reconsider Your Tax Withholdings

Paying above your tax rate can take money out of your pocket and make you wait until tax season to get your return. Instead, review this year’s tax brackets, assess your tax situation and increase your paycheck. Remember, your marriage status and household size can lower your tax burden throughout the year. For example, if you make $80,000 per year and recently got married, you could drop down to the 12% tax bracket if your spouse has less than $3,550 of annual income. Then, you can notify your employer’s HR department of any desired change to your withholding.

Capitalize on an Employer Match

A 401(k) can boost your income and retirement savings through matching contributions. For instance, your employer might match every dollar up to 5% of your paycheck. This perk is an easy way to multiply your retirement savings. Remember, you can contribute up to $22,500 to your account in 2023. Plus, the contributions will lower your taxable income.

Utilize Make-up Contributions

If you’re 50 or older, you can increase your retirement savings and decrease taxable income through catch-up contributions. Specifically, those who meet the age requirement can contribute an extra $1,000 to their IRA and $7,500 to 401(k)/403(b). This strategy can also help if you need to make lower contributions earlier in your career.

Cut Expenses

Your unnecessary expenses could cost you hundreds of dollars per month. For instance, neglected streaming services, delivery memberships and gym memberships can add up to $300 or more monthly. Likewise, eating at restaurants and using phone plans with unlimited data can strain your budget. So, it’s a good idea to sit down and review your last couple of months of statements from your bank and credit card company. Then, you can sort out which monthly bills you want to keep and which ones you can live without.

Take Care of Your Health

Fidelity recently found that a 65-year-old retired couple in 2022 requires at least $315,000 for healthcare costs over the span of retirement. While some of this cost is for Medicare premiums, retirees still face high out-of-pocket costs. As a result, taking care of your health while you’re young can help you enter your golden years without severe medical conditions. The less you visit the doctor or go to the emergency room, the less you’ll pay for healthcare expenses.

Stash Extra Cash

Lastly, when you use these strategies to generate more income, don’t let the money burn a hole in your pocket. Instead, put it toward your investments, whether you have an IRA, 401(k), real estate or another retirement asset. There’s nothing wrong with rewarding yourself – for example, by celebrating a $5,000 raise with dinner at a classy restaurant – but directing the bulk of the money towards savings will strengthen your retirement plan.

The Bottom Line

While millennials, people born between 1981 and 1996, have challenges from economic trends and student debt, comfortable retirement is still well within reach. Utilizing tax-advantaged retirement accounts and boosting income will allow millennials to leverage their earning power and rescue their retirement. The key is to focus on the goal and use surplus income wisely.

Tips on Rescuing Your Retirement

• A financial advisor can help you save for retirement by tailoring a financial plan to your situation and managing your assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Planning for retirement is essential, but so is maintaining your financial health during your working years. To that end, here’s how millennials can build a solid financial plan.