It might seem like just yesterday that millennials were in college, but the generation known for their tech-savviness, social consciousness and a preference for experiences over material possessions is getting older. As time goes on, many millennials are working hard to secure a comfortable retirement.
In 2023, there are exciting new ways to save for retirement, and GOBankingRates has spoken to experts about the specific steps and goals millennials need to know. Early retirement and financial freedom are more appealing than ever, and we’re here to help you understand the exact goals and strategies to achieve these dreams.
Have an Additional Savings Account
Suzanne Muniz, a certified financial planner with MsFiscal, advises keeping a reserve of at least three months’ worth of living expenses in a separate savings account or money market mutual fund that is not linked to your retirement accounts.
This precautionary measure serves an essential purpose: it shields you from the potential expenses of replacing appliances or car repairs without having to resort to borrowing from your 401(k) or making early withdrawals. Remember, withdrawing from a 401(k) or traditional/rollover IRA before reaching the age of 59 1/2 comes with a hefty 10% penalty on top of the regular income taxes.
Reduce High-Interest Debt
Mark Stewart, a certified public accountant at Step By Step Business, advises that one of the best financial moves millennials can make is to prioritize the reduction of high-interest debts, particularly credit card balances.
By chipping away at high-interest debts, you not only save money in the long run but also gain greater financial flexibility and peace of mind, enabling you to allocate those funds toward more meaningful financial goals, investments or even unexpected expenses that life may throw your way.
Make Sure Your Company Is Matching Fully
Muniz also emphasized the importance of contributing sufficiently to your retirement plan to qualify for the full company match. This is because the company includes their contribution as part of your overall compensation package.
In essence, taking full advantage of the company match isn’t just a smart financial move; it’s a way to maximize the value of your employment package and secure a more promising financial future in the long run.
Max Out Your Health Savings Account
This holds particularly true if you have a high deductible health insurance plan, as noted by Muniz. With this type of account, if you don’t end up using the funds for medical expenses, you have the option to withdraw them after you reach the age of 59 1/2, and they will be taxed as ordinary income at that time, much like your 401(k) or traditional/rollover IRA.
Essentially, it acts as a supplementary retirement account that offers you the flexibility to use the funds tax-free for immediate medical expenses, such as if you injure yourself during a beer league softball game or if your child breaks a bone from a tree-climbing adventure you previously prohibited.
Fully Fund Your Roth IRA
Muniz shared that you must fully fund your Roth IRA if you qualify — which is $6,500 max for 2023. She added that the reason is that there are “no required minimum distributions when you retire for you or your heirs.” She continued: “You have already paid income taxes, so everything grows tax-free.”
Muniz added that “this is especially helpful if your marginal tax rate is lower now than in retirement.”
Execute a Backdoor Roth IRA
“For those high-earning millennials, this planning maneuver can be a great way to contribute funds into a Roth IRA via a legal roundabout,” shared Christopher L. Stroup, MBA, CFP, with Abacus Wealth Partners. Stroup advised that it starts by making a non-deductible contribution to a Traditional IRA. “Once the cash clears your account, you immediately process a Roth conversion to move the funds to your Roth IRA,” he said.
Max Out Your 401(k) Contributions
Muniz emphasized the importance of maximizing your 401(k) contributions, which for 2023 is set at $22,500. The rationale behind this strategy is that the earlier you begin, the more substantial your retirement savings will be when you decide to transition away from the corporate world or pursue other life changes.
It’s a way to safeguard against a potential mid-life crisis. When you reach 40 or 50, your goals and priorities can shift significantly from the vision you had as a college graduate — just ask your Gen X relatives. However, you should evenly distribute your contributions throughout the year; if you reach the maximum limit in October or November, you’ll miss out on the company match for the remaining pay periods.
More From GOBankingRates