It’s no secret that people are living longer and longer. So far, the oldest person on record was Jeanne Calment, a spunky Frenchwoman who lived to the ripe old age of 122. While most people aren’t expected to live quite that long, the average millennial man and woman has a 3.4% and a 7.5% chance, respectively, of living to see their 100th birthday.
The average American today retires around 65 years of age, and needs enough money saved to fund a 22-year retirement. If that person lives to her 100th birthday, though, she’d need nearly twice that much – enough to fund a 35-year retirement, or even longer. Are you on track to save enough to live that long?
Luckily, millennials have a tremendous advantage on their side that none of the older generations have – time. So, how can millennials plan for retirement now?
1. Figure out how big your retirement nest egg should be
Different lifestyles cost different amounts of money. If you figure out what kind of lifestyle you want to live in retirement, you can plan for the nest egg that will provide you with a yearly income to support that lifestyle. Obviously, it’s not a hard and fast number. Over time, your health, likes, dislikes, and hobbies will change, but some things will likely be predictable.
For instance, do you want to live in an expensive area of the country like New York City, or a rural town in the Midwest? Do you want to travel, or stay close to home?
If you think the odds are high that you’ll live a long time, consider the cost of long-term care. It isn’t cheap: a 2015 study by Genworth showed that the average yearly cost of living in a private room in a nursing home was $91,250.
2. Figure out how much you need to save to build up your nest egg
Once you figure out how much you’ll need to support yourself into retirement, you’ll need to figure out how much you need to save to get there. For example, Fidelity Investments calculates that if want to maintain your current level of income in retirement, you need to save 15% of your income every year starting at age 25.
3. Take advantage of employer-sponsored retirement plans
The big advantage of employer-sponsored retirement plans like a 401(k) or a 403(b) is that they often offer matching contributions. Essentially, this means that if you put in some money, your employer will match it to varying degrees. For example, my employer offers 100% matching up to 10% of my income. If I put 10% of my paycheck into my 401(k), my employer ponies up the exact same amount. I get to keep all of it and watch it grow over time. Some employers only match the first 3% or 5%. That’s ok. Free money is free money.[You May Also Like: 3 Credit Mistakes That Are Costing Baby Boomers an Easier Retirement]
This is the most powerful type of retirement savings tool, because you will never beat a 100% return on your investment – not in any conventional, legal means, anyway. If your employer offers such a plan, you should absolutely take advantage of it and contribute at least the percentage they’ll match.
4. Use individual retirement accounts
After you contribute enough money in an employer-sponsored retirement plan to reach the matching percentage, then what do you do? What do you do if your employer doesn’t offer matching, or doesn’t even have a retirement plan at all? In that case, consider an individual retirement account (IRA).
The two main types of IRAs are Roth and traditional. Many young people favor Roth IRAs, because you pay taxes on the money when you put it in, not when you withdraw it during retirement. With a traditional IRA, on the other hand, contributions are tax-free. You’ll be taxed on the money and its earnings, when you take distributions.
Which is right for you? Many financial experts say the best tax is the one you can put off to a future year. Alternatively, try to guess when you’ll be in a lower tax bracket — now or in retirement.
Tip: If you think you’ll make more money in retirement, use a Roth IRA and pay the tax now. If you’re well into your career and you earn more than you expect in retirement, use the 401(k) and pay the taxes later.
5. Rethink your version of retirement
Today’s retirees are expected to work hard and save up a huge chunk of their paychecks until they reach a certain age when they magically stop doing all work and just hang out until they pass away peacefully.
Unfortunately, this model of retirement doesn’t work well for most people today. A 2015 study by the U.S. Government Accountability Office found that about half of people approaching retirement age have no savings whatsoever to support them.
The current model of retirement will not be sustainable in the future. Millennial retirees will need to consider delaying retirement longer than their parents and grandparents. Many millennials will also need to work part-time into retirement to supplement their income.
6. Consult an advisor
Retirement planning is a long and complicated process, different for everybody. These are just general guidelines, and you should talk to a qualified financial planner to create a custom plan for themselves. The earlier you start the planning process, the better.
Even if you don’t consult a financial advisor until well into your working years, the key is to start saving now. By harnessing the power of time and compound interest, there is no excuse for any millennial to go broke if they are lucky enough to live to 100.