Millennials are saving more than ever for retirement, at an average 7.5 percent of income. Still, this number, which was released as part of a recent report on retirement readiness from investment firm Fidelity, is far from the firm’s recommended benchmark of 15 percent per year.
For today’s young workers, planning for retirement readiness will look vastly different than it did for their parents. For most professions, pensions are long gone, and those that still exist face an uncertain future. To help keep millennial savers from making unnecessary retirement mistakes, financial experts shared the top retirement lessons young professionals can learn from viewing their parents’ retirement.
1. Create a Strategic Plan
Just six in 10 baby boomers have money saved for retirement, according to a recent report released by the Insured Retirement Institute. Of those who do, nine in 10 work with a financial advisor who has helped them establish a strategy to save for their golden years.
“One of the biggest mistakes people make with their retirement is to put off looking at what is needed for retirement until it's pretty late in the game,” said Katie Brewer, a certified financial planner and financial coach to Gen X and Gen Y savers with Your Richest Life.
Savers can start projecting their future financial needs as early as their 20s. “You should know whether you are on track for retirement or not in your 20s, 30s, 40s and 50s,” said Brewer. “You should start now and revisit your plan every few years.”
2. Start Saving Early
Many of our parents have saved just a small fraction of what they’ll eventually need to retire, which is why it's so important for younger generations to start saving as early as possible. Even making small financial sacrifices — like the cost of a daily morning coffee purchase — can be meaningful in the long run.
“You may believe you’ll work forever and have time to save, but often that isn’t the case,” said Jim Poolman, executive director of the Indexed Annuity Leadership Council. “Every six years you wait to get started doubles the required monthly savings you’ll need to reach the same level of retirement income.”
3. Create Multiple Streams of Income
Many retirees were planning on relying on just one retirement income stream, which turned out to be a bust when once-considered low-risk pension plans started to dry up a few decades ago.
Today’s workers, even though few have access to a pension plan, can still learn from that lesson by casting a wide net and creating a strategy that includes more than just a 401k payout. Retirement savings diversity can help reduce risk and improve return, according to information available on the U.S. Department of Labor website.
One suggestion, said Poolman, is “combining traditional savings vehicles like a 401k with low-risk options such as fixed-indexed annuities, which will help keep you financially healthy and on track to a happy retirement.”
4. Pay Attention to Investment Fees
Older investors tended to be more willing to hand the financial reins over to their financial planners, whereas many of today’s young workers have seen a flaw in that logic, said CFP Daniel P. Johnson of Forward Thinking Wealth Management.
“If an investor enjoys historical market returns and pays a 1 percent management fee, they will lose nearly 40 percent of their returns over a 50-year period of time, due to this management fee,” he said.
Instead, in his practice, Johnson sees millennials who are insisting — and rightly so — on greater fee disclosures and an insistence on shared decision making. Financially literate clients can understand just how much of their assets are working for them and what amount is going to their planner in fees.
5. Consider Downsizing
The average home today is 32 percent larger than it was in the 1960s. We have more needs, too, like dishwashers, pocket-sized computers and fast fashion trends. Today’s “necessities” were luxuries — or simply non-existent — for our parents.
It’s easy to assume you don’t have any wiggle room for extra retirement savings in your budget. However, “there's always an opportunity to improve your situation,” said Katie Gampietro Burke, founder of Wealth by Empowerment. She suggested creating a list of all your expenses.
“Everything from the gum you buy with cash at the gas station to the dog treats you pick up for your fur-baby,” she said. “See where you are spending your money,” and identify which expenses are necessary and which are not. Taking small steps to save along the way can add up to big results later on.
6. Automation Can Have Huge Results
Younger boomers age 55 to 59 have three times as much stashed away than do boomers age 60 or older, according to a recent survey released by Wells Fargo. The difference between the two groups: The former is more likely to have access to a retirement plan, which allows them to automatically set their savings strategy.
“The ‘Set It and Forget It’ strategy has been proven over and over again,” said Brewer. “Pick the amount to put away, pick a good mix of stocks and bonds, and automate it.”
Some retirement plans might even empower workers to automatically increase their contribution levels at certain intervals “like once a year,” said Brewer. “Automate as much as possible.”
7. The Unexpected Can Be Expensive
NYC-based fee-only financial planner Julie Ford with Ford Financial Solutions said she has seen many workers in their 50s who are unexpectedly supporting and caring for aging parents.
“This is a very new struggle with the new landscape of healthcare and longer life expectancies,” she said. As healthcare costs continue to rise in lockstep with life expectancy rates, there’s a “new urgency to save for retirement.”
Younger workers should take note: Your late-life expenses will likely include a few surprises, and some of them could be quite pricey. Insulate yourself from the possibility of running out of money by saving as early and as much as you possibly can.
8. There’s Often More Than Meets the Eye
Some young adults see their parents live a retirement that’s free from money stress. What they maybe didn't see is how their parents prepared for that retirement. “As children, you don't fully appreciate the sacrifices your parents made during your childhood to save for long-term goals, such as your education or their retirement,” said Ford.
“It's easy to lose sight of the priorities and sacrifices that made a parent's retirement possible,” she conintued. “We should be asking for these stories and wisdom from our parents.”
Young adults who can learn to model their parents’ gratification delay, and save with an eye on the long term, will likely have the most success when it comes to saving for their own retirements.
9. Manage Your Debt
The more you have to pay out to your monthly debtors, the less you’ll have to live on — which is something upcoming retirees are dealing with. “Unlike previous generations, retiring boomers are entering retirement with debt,” Laurie Samay, CFP and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y.
“This means that a portion of retirement income will need to be diverted from living expenses to repay debt and make interest payments," she said. “If you learn anything from your parents, it’s this: Pay down your debt before you enter retirement."
10. Fund Your 401k
Younger baby boomers have accumulated a large portion of their retirement wealth via their 401k or other employer-sponsored retirement plans, according to the Wells Fargo retirement study. “Follow their lead by taking advantage of any employer-sponsored retirement plans, such as a 401k, that may be available to you,” said Samay.
“If your employer doesn’t offer a retirement plan, or you would like to make additional contributions, consider contributing to an Individual Retirement Account or a Roth IRA,” she added. “The sooner you start making contributions, the less you’ll have to save in the long run due to market gains and compounding.”
11. Take Care of Your Real Estate
For many Americans, the value of their real estate has a large effect on their overall wealth and potential retirement income. Some “parents have done really well ... because the mortgage is paid off, and the home is valuable,” said John Bodrozic, co-founder of digital home management service HomeZada. Then there are those whose “home is dragging down the overall retirement asset view.”
The lesson for millennials is that their homes should be viewed as a financial asset, particularly over a long time period. “They should learn the importance of what needs to get done to manage, maintain and improve the home over time,” said Bodrozic. A well-maintained home can have a dramatic impact on an overall retirement portfolio.
12. Properly Insure Your Family
The ramifications that come from the loss of a parent are often more than just emotional. “Maybe you experienced the death of a parent who was underinsured, and you saw how that affected your family,” said Ben Offit, partner and CFP with Clear Path Advisory. Particularly for a bread-winner parent, it’s important to plan for the unthinkable, even though it’s often uncomfortable to do so.
It's best for a young professional to consider a term life insurance policy when they’re still young and healthy, said Offit. That’s when policy premiums are likely to be at their lowest. If you wait until you're older or you incur a major health problem, you might be unable to get a policy at all.
13. Conduct a Regular Financial Checkup
If you carefully tend your retirement plan over time, you have a better chance of meeting your retirement goals. “A lot of people think they are on track, but really have no idea what their retirement balances look like,” said Katharine Perry, a financial consultant with Fort Pitt Capital Group in Pittsburgh.
Millennials can turn the tide by setting a regular checkup schedule, so they can make sure they’re saving enough. “If you are close to retirement and still in a deficit, then ramping up savings might be necessary,” added Perry.
14. Life Gets More Expensive as You Age
What many parents have learned as they aged is that as wages grow, so do expenses and, ultimately, the cost of living your lifestyle. For those who wait to start socking away retirement funds, “their savings rate won’t be as high,” said Perry.
Unfortunately, many millennials are already making this mistake. “Many millennials do not participate in their company retirement plan because they have the mindset that they’ll ‘never get old’ or ‘I’ll save later, when I’m making more money,’” said Perry.
This is because they haven’t already learned to set aside the money in their budget. Develop the saving habit early, she said, before you have an expensive roof that can leak or child who’s ready to leave for college.
15. Don’t Borrow From Your 401k
One way to torpedo your 401k is to borrow from it. “I’ve seen a number of people from the older generations take a loan from their 401k or an early distribution from an IRA,” said Perry. “They think of this money as an ‘emergency fund.’ It is not,” she emphasized.
A 401k loan can undo all the care you’ve taken with your savings over time. Depending on your employer’s retirement plan guidelines, you could be charged added interest and fees, but that’s just the tip of the iceberg. The bigger issues are that, as you repay your loan, you’ll forgo the compound interest that money could be earning, new contributions could be suspended and your take-home pay will be reduced.
Worse yet, decide to switch jobs or unexpectedly get downsized and your loan balance could come immediately due — or be subject to a stiff tax penalty, as well as taxed at your ordinary income tax rate. The best course of action: Leave those funds alone. Don’t borrow unless it’s an absolute last resort.
16. Retirement Assets Shouldn’t Fund Tuition Payments
Perry said she has had her fair share of clients ask how to access retirement account funds to pay for their child’s college tuition. However, here's one way to consider this decision — “You can get loans for school, but you can’t get loans for retirement,” said Perry.
A retirement account “should be something that’s untouched until you need it. It’s all that you’ll have to live on once you stop working,” she said. “Who knows if Social Security will be around by the time millennials retire,” she added.
17. Retiring at Home Might Require Pre-Planning
Many baby boomers want to stay in their homes for as long as possible, and yet very few are planning ahead to make it happen, according to Home Accessibility Consulting principal Michael Saunders.
“As we age, our housing needs change,” said Saunders. Some might need to make structural modifications to the home to keep it livable for aging bodies, whereas others might need to plan their cash flow needs around the maintenance of the existing structure.
“When I speak to millennials, I often suggest they craft an aging-in-place strategy as early as possible,” said Saunders.
18. Add Stability to Your Investment Portfolio
Many baby boomers saw their stock-heavy portfolios decline during last decade’s recession. Although equity investments are necessary to promote long-term growth, those riskier assets should be balanced out with a more stable security to help cushion the blow during tumultuous markets.
“There is now a new type of Roth retirement account, the myRA, that guarantees your savings will never decline in value,” said Emily Brandon, senior editor at U.S. News & World Report, and author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
“There’s only one investment option: a Treasury savings bond that pays a variable interest rate,” Brandon added. “However, investors can only use this account until they accumulate $15,000 or the account turns 30 years old, after which your savings will be transferred to a private sector Roth IRA.”
19. Frugality Can Go a Long Way
Finding smart ways to save money throughout your adult life can help put you on the path to meeting your retirement goals.
“My mother has always been frugal and saved all her life for retirement,” said Pauline Paquin, personal finance expert and founder of Reach Financial Independence. Paquin watched as her mother, a single mom raising a family on a teacher’s salary, scrimped and saved to plan for her future.
“I've seen firsthand that little amounts add up if you start early enough,” she added, indicating that the earlier you start, the greater benefit a young investor can reap from compounding interest. “Plus, since you already live frugally, you won't need that much [in retirement]."
20. Control What You Can and Let Go of the Rest
If you’d asked your parents when they were your age, most of them wouldn’t have predicted the huge run-up in housing prices at the turn of the century or the recessions that occurred in the early '70s, in 1980 or most recently late this past decade.
“How much you save now is the only variable under your complete control,” said Christine Haviaris, CPA and independent registered investment advisor in Pearl River, N.Y. "There are houses to buy, kids to raise and vacations and fun stuff, but if you start [saving] early, you can have your cake and eat it, too."
In other words, control what you can now. That can help you be prepared when life’s expenses mount and the unexpected inevitably strikes.