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Millennials: A Nerds-Eye Look At Your Retirement If You Started Saving $10 A Day

April 04, 2018
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Millennials get a bad rap, no doubt about it. The stereotypes are generally negative: lazy, self entitled, no drive, no motivation. Generally people think of Millennials as the generation of “me”.

Are these stereotypes fair? We are here to tell you: when it comes to you, it doesn’t matter what the stereotype is! A stereotype doesn’t have to define you!

Today, we’ll look at a way Millennials can save for a prosperous retirement. We'll get nerdy and break down all the numbers for you.

A new report by Forbes shows that two thirds of Millennials have nothing saved for retirement. That is astounding considering 66% of Millennials are working for an employer who offer an employer-matching retirement plan. Furthermore, the study shows that just 5% of Millennials are saving enough for retirement. But again, just because the majority of your peers aren’t doing it, doesn’t mean you can’t!

Let’s take a look at what is “enough” for retirement and if $10 a day will get you there.

You’ll see there are a lot of pieces to this puzzle. But we’ll try to break it down starting at the income we hope for in retirement, working backwards to determine how to get to that number.

So, let’s start with the “enough” part of the equation. How much is enough for retirement? This is a trick question because it is very unique to you. What is enough for you may not be enough for someone else. Naturally it comes down to what you are looking to do in retirement and how much you’ll need to do it. But for the purposes of this article, we will assume “enough” is an average, middle-class lifestyle. If you want to go with a different number, you can simply apply these same principles but adjust the figures. We’ll go with $85,000 a year.

Millennials were born between 1982 until 2004. That means the average Millennial is 25 years old in 2018. Assuming you are looking to retire at age 65, this means you currently have a 40 year investment time horizon.

If you were to set aside $10 per starting right now (age 25), invest it (over 40 years) and average an 8% annual return, you should have compounded close to $1.1 million by age 65.

Remember, the goal with retirement accounts is to withdraw from it in such a way that you can live off of it, and you don't outlive it. Your retirement nest egg should still be invested, but likely in much more conservative investments since you can’t risk being subject to large market swings this late in your life. Your returns will probably be a little lower than when you were investing for growth, but not as risky. Then, if inflation cuts into that by 2-3%, we can pretty confidently say that a 4% withdrawal rate is sustainable to last throughout your retirement years. 

So, if a 4% withdrawal rate is sustainable that means with a nest egg of $1.1 million you’re looking at a withdrawal of $44,000 per year. Well short of our $85,000 target. So, the answer to our question of whether or not $10 per day is enough for retirement is, well, no. Not even close. But don’t get discouraged!

There’s more to the story.

This only makes up what we call “nonrecurring” revenue. Recurring revenue is also an option. Employer pensions and social security benefits are the most common types of recurring revenue we see. While some might argue that social security won’t be there by the time Millennials retire, the possibility remains.

If your employer doesn't provide a pension, you don't have access to social security and you have no other income source in retirement, then realistically in order to provide $85,000 a year in income you would have to save $2,125,000.

How do we get there?

First, and this is obvious, start saving now if you haven’t already! We have found in our experience that the difference between those who reach their retirement goals and those who don’t has little to do with income and resources, and more to do with lifestyle and self discipline. If you live within your means, you are managing your debt and you’ve begun saving for retirement, you are well on track. But there’s more.

Secondly, you need to construct a well diversified portfolio. Have a professional do it for you built with your risk factors and end goal in mind. Investing is a tool you can leverage to help you reach your retirement goals.

Finally, you need to have a plan. Plan, plan, plan. This is all we talk about. Failing to plan is planning to fail. Have a plan, and determine the steps you can take right now to put you on the right path towards your long-term end goals.

Good luck on your journey!