The 6 Keys to Successful Retirement Planning for Millennials

Millennials are facing different challenges when it comes to retirement planning compared to other generations, said Sean Rawlings, a financial advisor with GoldBook Financial in Scottsdale, Arizona. For one, Social Security benefits will most likely be reduced or the age at which someone can start receiving benefits will be extended.

Many millennials have also shifted to self-employment and the gig economy. So the burden of saving for retirement, along with covering major expenses such as healthcare, has fallen more squarely on their shoulders.

“Inflation is also a massive concern for millennials,” Rawlings said. “We will likely see higher inflation and/or tax rates for millennials, especially when it comes to retirement planning.” According to a 2022 survey by Voya Financial, 73% of millennials agreed or strongly agreed that they are worried about the impact of inflation on their ability to save enough for retirement. Additionally, 57% of millennials agreed or strongly agreed that they will need to delay retirement due to inflation.

While that might make saving for retirement seem like a daunting task, know that it doesn’t have to be. Below are a few ways millennials can successfully plan for retirement and stay on track.

One of the best things you can do while you’re young is avoid lifestyle inflation, according to Lauren Anastasio, senior CFP at Vanguard. That’s when you allow your lifestyle to become more expensive as you earn more during your career. “It’s a common phenomenon to go from living with roommates to having your own place once you start making your money, or trading in your modest car to lease a new luxury vehicle,” she explained.

So how do you combat it? A good rule of thumb, Anastasio said, is to target saving at least 50% of each pay increase you receive during your career.

As you’re saving and planning for retirement, Anastasio said to be sure you’re not overlooking your tax-efficient account options. “Leveraging 401(k)s, IRAs and HSAs, when available, will be hugely impactful when growing your savings over time,” she said.

That’s because the gains you earn on investments are usually taxable. However, putting your money in tax-efficient accounts allows it to grow without paying taxes each year. Whenever possible, try to max out these options before investing in taxable brokerage accounts.

You probably know that you need to follow a budget. But you might not know where to begin with creating one. There are many different budgeting strategies out there, but one of the simplest is the 50/30/20 rule. It’s the method recommended by Tom Armstrong, vice president of customer analytics and insight at Voya Financial.

Here’s how it breaks down:

• 50% of income: Needs (housing, food, transportation, minimum debt payments)
• 30% of income: Wants (entertainment, dining out, shopping) 
• 20% of income: Savings (emergency fund, retirement account)

While your spending might not line up exactly with these numbers, they make for solid guidelines that will keep you on track.

“Millennials have the greatest advantage in wealth accumulation: time,” said Robert R. Johnson, a CFA and professor with the Heider College of Business at Creighton University. As long as you save consistently, you can take advantage of the power of compound interest, meaning you can contribute less today and reap higher returns than if you tried to catch up later.

Johnson suggested investing in low-fee, diversified equity index funds (like one that tracks the S&P 500) and continuing to invest consistently “whether the market is up, down or sideways.” Dollar-cost averaging is one strategy that can help you do just that.

Counterintuitively, one of the biggest mistakes many people make when preparing for retirement is not taking enough risk, according to Johnson. “Individuals need to be taught to invest for retirement and not to save for retirement,” he said. “The surest way to build true long-term wealth for retirement is to invest in the stock market.” In fact, since 1926, U.S. stocks returned an average of 10.3% annually.

However, Johnson noted that taking more risk doesn’t mean swinging for the fences. “Investing in speculative assets is not prudent risk-taking,” he explained. It’s important to invest your retirement funds in reputable, proven stocks and funds that match your risk tolerance and goals.

When it comes to preparing for retirement, your job may have much more to offer than a 401(k). As you focus on building your savings and improving your overall financial well-being, it can help to ask what types of assistance are available at work. 

“The reality is that many individuals don’t recognize how many great resources are available to them — and many without cost — directly from their employer,” Armstrong said. More workplaces now offer financial wellness solutions to support their employees, including HSAs to offset the burden of medical costs, student loan repayment support and tools for building emergency savings. 

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