Each generation faces its own challenges when it comes to saving and providing for retirement.
If you’re a Baby Boomer, and at or near your retirement years, you likely had never heard of a 401(k) when you began your career, since they didn’t even exist before 1980, and were not offered by many employers until well after that. You may have thought that eventually you’d have a pension – how did that work out for you? You’ve probably seen your retirement savings affected by the recession in 1990, the dot-com bubble “popping” in 2000, the after effects of the 9/11 attacks in 2001, the bear market and financial crisis in 2007-2009 and by the sell-offs in 2011 and 2015. Whew! It’s been quite a ride.
The Millennial you care for hasn’t had to deal with any of that. But they have their own challenges. They entered the labor market at a time when wages have been depressed and few employers are clamoring for their skills. The generations ahead of them have been working longer before retirement – which means fewer job openings, as well as fewer opportunities to rise within their companies. Student loans aren’t exactly the same as when you went to school. Many employed Millennials with decent jobs can’t really envision a time when they’ll be finished paying off those education-related debts – which means it is more difficult for them to save for retirement and still meet ongoing living expenses.
We all face the prospect of seeing Social Security income dropping in the future – if we live long enough. There are simply fewer workers paying into the system and too many receiving payments from the system to keep going at the same rate without some major changes. It’s possible that we will see the estimated income replaced by Social Security drop from the current average of 40 percent to 30 percent or less within the next couple of decades. If that happens, everyone will need more “other” income for their retirement years.
Again, every generation faces its own challenges with respect to retirement. But there are some ways you can help “your” Millennial(s) to better prepare for their future retirement years.
Option 1:
If you have plenty of money for your own retirement, and enough extra available, you could set up a trust fund type of retirement account and let it grow until your Millennial has need of it.
If your Millennial is currently 22 years of age,
start with $150,000 as an initial deposit, and if it grows at an average of 6%, he or she could have about $2,064,691 by 67 years of age
start with $225,000 as an initial deposit, and if it grows at an average of 6%, he or she could have about $3,097,037 by 67 years of age
If your Millennial is currently 37 years of age,
start with $350,000 as an initial deposit, and if it grows at an average of 6%, he or she could have about $2,010,221 by 67 years of age
start with $525,000 as an initial deposit, and if it grows at an average of 6%, he or she could have about $3,015,332 by 67 years of age
Option 2:
Teach them.
It’s a lot like having “The Talk” with your children as they begin to mature physically. If you don’t talk with your children or grandchildren about finances, budgeting and saving for retirement, someone else will. And you don’t know if they’ll be hearing the truth or getting some bad advice.
Let them learn from your hard-won experience. Talk about how to handle money.
It’s possible they aren’t saving (or aren’t saving enough) for their retirement simply because they haven’t thought it through. Or perhaps they don’t understand the importance and impact of beginning in their younger years.
Help them learn about the “magic” of Compound Interest. The government has a simple Compound Interest Calculator on the Securities & Exchange Commission website at investor.gov. Plug in some numbers with your Millennial and let him or her see what a difference time makes.
For example, using that calculator,…
If your Millennial is 22 years of age today, then they have 45 years remaining until they hit their Social Security “full retirement age” of 67. Show them what happens to the same amount ($1,300) when it is saved at different points in their life.
- If they save $25 per week this year, and never add to their savings again, they could have $16,881 saved by the end of the remaining 44 years if they average just 6% interest growth.
- If they wait to save $25 per week 10 years from now, then never add to their savings again after that year, they could have $9,426 saved by the time they turn 67 if they average just 6% interest growth.
- And if they wait and save $25 per week the year they turn 65, they could have $1,378 saved by the time they turn 67 if it grows at 6% interest.
The same $1,300 investment produces vastly different results in retirement – all depending upon when it is made. You already knew that, but your Millennial may not realize it. You might want to suggest they follow Texas Financial and Retirement on Facebook, so they’ll learn more general financial information over time.
Option 3:
There is a way you might be able help your Millennial to pay back student loans and save for retirement at the same time.
You may or may not be a guarantor on your Millennial’s student loans. Regardless, you might use paying off the student loans as a way to teach about saving – and make saving for retirement possible, as well as habitual.
If you don’t want to set aside the big initial deposit described in Option 1 above, or simply cannot afford to do so, but can afford to help with a smaller amount each month, here’s an idea.
Since your Millennial is already obligated to pay monthly payments on his or her student loans, offer to make the loan payments for them IF they deposit an equal amount into their retirement savings and send you the receipts/screenshots. If they do so through an employer-sponsored 401(k) plan at work, they might also receive additional matching savings from their employer. And they’ll see for themselves the tax savings available for donating money toward their retirement each year.
They won’t have any more or less spendable cash right now, but they will be building a retirement account while still paying their bills and establishing good habits. They will be developing a habit of saving for their retirement, and that habit is likely to continue even after the loans have been paid off.
Option 4:
Leave them an inheritance.
Assuming you’ve saved and invested and have your own retirement arranged comfortably, you may be able to help your Millennial by leaving them an inheritance.
That depends, of course, on how much more you have than what you need for your own retirement. It also requires that you minimize the tax burden and other costs of transferring the inheritance to your Millennial when that time comes.
That’s one of the things we focus on at Texas Financial and Retirement. Many people who have saved correctly over their lifetimes stumble when it comes time to preserve their savings as they enter retirement – or when it comes time to distribute their estate to their heirs. We can assist with planning to help make those transitions smoother.
Contact James Holloway Sr. and the team at bestclients@texasfinancialandretirement.com or 903-534-5477 and ask about a free initial appointment. We’ll talk about your current financial position and your financial needs and goals (like providing for your Millennial), then work to develop a plan to help you maximize the benefits of your hard work – both for yourself and for your loved ones.
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