For millennials, retirement can seem like a long ways a way. And you know what? It probably is: for the oldest millennials, retirement may still be 25-30 years down the road. But that doesn’t mean they don’t have to think about retirement for another 25-30 years.
What is a “millennial”?
The definition varies a bit, but generally speaking, a millennial is a person born between 1980 and 2000. According to an August 2015 Forbes article, the term “millennial” was coined back in 1991. It was believed that the generation of children born during this period was going to be drastically different than the generation of children born in the post-World War II era — the generation commonly referred to as Generation X. Simply calling this new generation “Generation Y” seemed inadequate, and so the designation “millennial” was coined, partly inspired by the new millennium that was only a few years a way.
Are you a millennial?
You may have been born during the time period that defines “millennial” but whether or not you consider yourself a millennial doesn’t matter. The term is first and foremost a label, and though it was conceived and is often used innocuously, many people are understandably quick to reject it and any other label. That said, the term does help us identify and refer to a large group of people who are facing financial issues that other generations haven’t had in the past — at least, not on the same scale. So even if you don’t consider yourself a millennial despite fitting the definition, it’s important to recognize the financial issues that you and many people in your generation are facing today.
Lule Demmissie, Managing Director at TD Ameritrade, summarizes the millennial’s situation succinctly:
Millennials are the most educated generation, yet they’re earning less, their median net worth is down, and many face decades of student loan payments. Pair that with the uncertainty surrounding their retirement, and they appear to be facing a less-than-bright future. Not to mention that one in five millennials is also providing financial support to aging parents to the tune of $18,250 a year – taking a huge chunk out of their budgets. It’s no wonder they’re pushing off having families, starting businesses or buying houses.
Simply put: many millennials aren’t making enough money to pay off debts, support their parents, save for retirement, buy a home, and achieve other financial and life goals.
Why focus on retirement?
It is for these reasons that most millennials — 90% according to Nerd Wallet’s infographic above — are not confident they will have enough money during retirement. There are so many pressing financial needs in the present, saving for the future seems like a luxury or a pipe dream. And it’s true: for many people — millennials and otherwise — it’s truly impossible for them to save and invest for retirement. But is that really true for you or have you not yet found ways to work retirement savings into your budget?
For millennials, retirement may be far into the future and it probably doesn’t seem like it needs to be a priority right now. But here’s the thing about retirement: even if you have a retirement plan, you won’t really know when or why you will retire until you get closer and closer to retirement. Maybe you think you will work until you’re 75 but what happens if health becomes an issue at the age of 55? What if you’re forced into retirement at 65? You may think you have a lot of time to save for retirement but that may not necessarily be the case.
And that’s why focusing on retirement when you are young is so important: your retirement savings will be your primary source of income when you are retired. If that isn’t enough and if you can’t find work, what will you do?
Saving and investing now.
We’re not trying to scare you but we do want to encourage you to take an honest look at your financial situation. Again, millennials don’t have it easy, and it can be difficult to prioritize retirement savings over other financial needs and goals right now. But by investing in an IRA, 401(k), or some other retirement account now, you can take advantage of all the time you have before you retire.
That’s because the longer you are invested, the more time compound interest has to work. Consider this chart from Business Insider:
In this example, Susan, Bill, and Chris all invest $5,000 annually. Even though Susan only invests for ten years ($50,000), because she started investing at the age of 25, she ends up with more money at the age of 65 than Bill, who begins investing at the age of 35 and invests a total of $150,000. Chris also begins investing at 25 and despite only investing $50,000 more than Bill, he ends up with almost twice as much money.
It’s important to remember that this graph is only an example and it’s impossible to predict how your savings and investments will grow over time. However, this is a good visual reminder of how compound interest works and showcases one of the reasons it’s important for millennials — and everyone else — to start saving and investing for retirement as soon as possible.