11/4/2011 6:08 PM ET|
Gen Y's retirement: $2 million
Twenty-somethings will need to save much more than their parents did for retirement. To do that, they'll need an early start -- and a game plan.
Retirement won't be impossible for Generations X and Y, but compared with the baby boomers, they will need to save considerably more to make up for less employer and government help.
Fewer young people have access to generous retirement benefits, including traditional pensions and retiree health insurance. And those born in 1960 or later must wait an extra year, until age 67, to claim the full amount of Social Security they are entitled to. Those who claim at the same age their parents did will get less.
Here are some ways 20- and 30-somethings can get on track to retire comfortably:
Set a worthy goal. In a 2010 survey of 226 registered investment advisers commissioned by Scottrade Advisor Services, more than three-quarters (77%) suggested a retirement savings goal of at least $2 million for members of Generation Y, defined by the study to include those ages 18 to 26. Sixty-eight percent of the investment advisers said members of Generation X should also aim to save more than $2 million.
"For a Generation Y person who thinks she wants to retire at around age 70 who is going to have slightly above-average annual expenses, $2 million is probably the right number," says Michael Farr, the president of the Washington, D.C., investment firm Farr, Miller & Washington and the author of "A Million Is Not Enough: How to Retire With the Money You'll Need." But he cautions, "Most people who have high incomes and the ability to set aside $2 million will likely have more-expensive lifestyles."
However, other studies have found that young people may be able to get by on less in retirement. Human resources consulting firm Aon Hewitt calculated that Generation Y workers, whom it defines as people ages 18 to 30, will need 18.7 times their final pay for retirement, including Social Security, traditional pensions, and personal savings, to maintain their current standard of living after retirement at age 65. For someone whose final salary is $75,000, that's just over $1.4 million, and Social Security will provide part of that.
Aon Hewitt estimates that Generation Xers (ages 31 to 45) will need 16.1 times their final salary to pay for retirement. "A higher earner will probably continue to spend more in retirement," says Janet Tyler Johnson, a certified financial planner and president of JATAJ Wealth Management in Fitchburg, Wis. "It's really dependent on how much you need in retirement."
Take advantage of employer help. Getting to $2 million will take some effort, even if you start saving early. A 25-year-old will need to save about $7,405 annually, or $142 per week, to get there over 40 years, assuming an 8% annual return. Retirement account contributions from your employer will make it much easier to hit your retirement savings goal. If your employer matches your 401k contributions with $2,000 per year, you'll need to save only $104 per week to have $2 million by age 65, again assuming an 8% annual return.
Control costs. Minimizing investment fees and expenses will help you to grow your nest egg faster. That's because high expense ratios for mutual funds can result in a serious drag on your long-term returns. Getting a 7% annual return instead of 8% over a 40-year career (because you are paying 1% in yearly fees) means you will need to save $2,255 more per year to still hit $2 million by age 65. Index funds generally charge much less in annual fees than actively managed mutual funds do. "If I didn't manage my own money, I would buy an S&P 500 index fund because it is low-cost," says Farr.
Get a Roth IRA or 401k. Roth 401ks and IRAs allow young people, who are likely to be in a low tax bracket, to prepay taxes on their retirement savings. "Young folks are in a lower tax bracket now than they will be in the future, including when they begin to tap into their retirement savings," says Joe Alfonso, a certified financial planner for Aegis Financial Advisory in Lake Oswego, Ore. "You're giving up the current tax deduction, but you are basically getting tax-free retirement income that would otherwise be taxable in the future." Once your contribution is made with after-tax dollars, that money can continue to grow for the rest of your life without the drag of taxes. If you wait until age 59 1/2 to withdraw the money, you won't have to pay taxes on any of the growth. (Will your 401k provide enough? Find out with MSN Money's calculator.)
Maximize Social Security. Social Security provides a base level of income that your retirement savings should build upon. Take steps to maximize the amount you get by making sure you have at least 35 years of earnings under your belt before you sign up for payments, so that zeros won't be factored into your calculation. And carefully consider the age at which you begin to claim benefits. Payouts increase for each year of delayed claiming between ages 62 and 70.
Don't plan on retiring at 65. A male born in 1946 can expect to live 18 years after retirement at age 66, according to Social Security Administration projections. Men born in 1980 should plan for at least a 19.3-year retirement, after the higher retirement age of 67. For women, the average projected length of retirement jumps from 20 years for those born in 1946 to 21.2 years for those born in 1980. And these are just the averages. "Generation Y's life expectancy is going to be a lot longer," says Farr. "They have to fund more years of retirement than the old financial planning models built in."
Of course, you don't have to retire at age 65, or at what the Social Security Administration defines as the full retirement age, which is 66 for most baby boomers and 67 for younger people. Working a few extra years gives you more time to save, allows your investments more time to compound and reduces the number of retirement years your savings must finance. If you're 25 now, and willing to work until age 70, you could reach $2 million by saving just $95 per week, assuming an 8% annual return and not even counting the 401k match.
Don't get hung up on the number. How much you need to save for retirement largely depends on your expenses. If you're willing to pay off your mortgage before retirement, move to a smaller house or low-cost area of the country, and live a modest lifestyle, you may find a way to get by on less. Conversely, those who want a lavish retirement will need to save more.
"If you've got a goal based upon assumptions about inflation and rates of return, it's actually counterproductive, because those numbers can be pretty big, especially for young folks," says Alfonso. "It's more important to focus on the things that you can control, such as the percent of your gross income that you save, and to really focus on your career and moving up the salary chain."
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Something struck me when reading all these posts.....We dont need 2 million to retire. we need to get back to the basics. We dont need cell phones, tablets, tvs in every room, dinner out every night, expensive cars etc.... We need to get back to the basics. Spending time with family, reading, working around the house etc... In other words everyone is so materialistic anymore... it's all about what you have these days.... Be happy you are even alive and have friends and family..... When you lie on your deathbed are you going to say... "gee I am glad I have 2 million dollars"... or are you going to say "gee i wish I had just one more day to spend with my family/kids/friends"..... Think about it....
What do they recommend for people living paycheck to paycheck to survive? $142 a week?! That might be a family's grocery budget! I doubt many people today will even earn $2 million in their lifetimes. Sorry but this article does not represent real life...to many low wage go nowhere jobs to make this happen.
2 million through private savings? Average salary of 75k? 10% annual 401k contribution and employer matching? 8% guaranteed annual return?!!!
Who the hell are these people kidding? That's way out of the range of most college educated Americans.
I LOVE it. We're supposed to wait until 67 to retire, but if you get laid off at 50, try getting another job. And assuming you are employed and your employer actually offers a 401k, many do not match until you have worked in the company for five years. In my industry, hiring and firing are commonplace. You are lucky if you last the required time to be fully vested and receive matching funds. So there's that.
This article is simplistic, simplistic, simplistic.
Tell me how to get 8% consistent over all those years and I will
start today - lets be realistic
Two million? Get real. By the time Gen Y retires the Fed will be working on QE 15, inflation will have increased the price of a gallon of gas to $50, and Facebook will be charging everyone $2,000 a month to use its High Definition, 3D Skype based website so they can share their horrible experience of an unsuccessful 30-year job search.
"Work until 70", you cannot be serious. I have seen too many people work until their sixties and keel over soon after retirement. The government would love nothing more than to have you to work until you drop.
Than again, the slaves of ancient Egypt drugged on until the end with high hopes of brighter things ahead, perhaps we have much in common with them.
When I started working full time at 22 I was very progressive and put 20% of my paycheck away in Mutual Funds (this was 1997)...I was told every year by my financial advisor that my investments should provide me with an average of 7% returns and that my money should double every 7 years. Its been 14 yrs now and I have a $1,000 more in my 457K than what I have invested, boy do I ever feel lied to, I should have blown my money on women and beer like my friends did.
I personally see no reason why I would want to retire in this expensive country. Two Million! Basically that means that the majority of Gen Y and Gen X people will be working until they die. Depressing. Wait, not so fast...there are so many great places in the world to be able to retire. South Amercia, Central America, Southeast Asia. Bangkok Thailand for example has a Joint Commission Accredited Hospital and Thailand overall has great healthcare. Everyone else can work til they die, but I am not affraid to travel out of my comfort zone to secure a healthy and affordable retirement. See you in Thailand folks... when I'm 55!
Oh yeah, I plan on retiring when I turn 62 or REDUCE my days at the J.O.B. drastically(I don't want to get too bored now)!!
IM 30 YEARS OLD AND UNEMPLOYED , MY RETIRING PLAN IS TO LOTTO MY WAY OUT OF THIS CRAP HOLE IM IN.
Roth 401ks and IRAs allow young people, who are likely to be in a low tax bracket, to prepay taxes on their retirement savings.....Once your contribution is made with after-tax dollars, that money can continue to grow for the rest of your life without the drag of taxes. If you wait until age 59 1/2 to withdraw the money, you won't have to pay taxes on any of the growth.
Not so quick......if you vote for a National Sales Tax or consumption tax (just vote for a Republican), you'll be paying taxes AGAIN when you spend the money after you retire.
Be careful what can happen through the back door. Take the tax deduction NOW, while it still exists, and don't gamble that the rules will always stay the same.
I just checked my 401k provider website: Only 5 out of the 26 funds available have 10 year returns of 8% or greater. Wasn't 8% the return used to calculate all those pensions that are currently underfunded?
Although their general advice may be worthwhile, articles like this are entirely speculative. I'm at the verge of retirement myself, and I can' tell you exactly how much anyone needs to retire, even right now. It depends on a lot of factors. So the idea of putting up a number for anyone in their 20s or 30s, that's just speculation.
Just learn general thrift, and that very few things are actually "necessities". Stop trying to live the life of Riley, especially in expensive big cities. You'll work the rest out.
(Did that guy below say he makes over 40K a year and can't save anything? What a tool!)
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