How’s your plan for retirement going? No matter what stage of life you are at, this should be on your mind. There are many unforeseen challenges that could make retirement planning difficult, including reduced Social Security and Medicare benefits, higher taxes and inflation rates, fewer traditional pension plans, lower market returns, and rising life expectancies and health care costs. Let’s talk about — and debunk — some common myths.
Retirement planning is for older people
Retirement naturally feels far off for young people beginning their careers. This is only reinforced by communication from employers and the financial industry that’s aimed at those approaching retirement ages. In addition, this generation grew up during a time of instant gratification when you could find the answer to almost any question with a few thumb clicks; retirement planning is a long, slow process that may not pay off for decades.
The good news is millennials have time on their side. Starting early can have a dramatic impact on retirement preparedness, not only because it means saving more over your lifetime but also because those savings have a longer time to grow and compound. If you can start with only one percent of your income, it’s better than nothing and helps build the habit of saving.
I don’t have to think about retirement; my employer automatically enrolled me
Automatic enrollment has helped many young people get started in their 401(k) plans, but it can also lull you into a false sense of security. The average automatic enrollment rate is three percent: far less than the 12-15 percent experts suggest a typical employee should be saving. It’s even less than the six percent employers will often match up to.
I need to pay off my student loans first
This is understandable. However, student loan rates tend to be relatively low, the first $2,500 of interest paid is tax deductible for many taxpayers. If your loan rates are less than 5-7 percent after taxes, you could probably earn more investing in your 401(k) than you would save in interest by paying down those student loans early. On the other hand, if you have credit cards or other high-interest debt above 5-7 percent, it does make sense to pay them off first.
Investing is too complicated
Many are intimidated by having to pick investments. Fortunately, a growing number of retirement plans offer advising tools and options to help simplify the process. These tools can be ideal for young people with little money outside their retirement accounts.
I’ll never be able to save enough for retirement
You may not be able to save much early in your career, but that can change as your income rises and your money management skills improve. If your retirement plan offers auto-escalation, consider taking advantage of it. With this feature, you can have your contribution rate slowly increase over time. You may not even notice the difference in your paycheck, but pretty soon you could be saving more than you ever thought was possible.