For Generation X and Y Financial Well Being Means Start Early


woman standing at the shore lineFor members of Generation X and Y who plan to enjoy a higher level of retirement income, the amount could be significantly higher than $2 million, which is a daunting figure for someone in their 20s, 30s or even 40s to face. However, smart financial strategies implemented early in the Gen X and Y career can help make that goal a reality — even for those with smaller incomes.

Here are three tips that Gen X and Y can use to ease the burden of saving for a costly retirement:

1. Cut costs and maximize savings

The cardinal rule in any long-term saving strategy is to keep your expenses low and save as much as you can while still living comfortably. Controlling your costs — even in small amounts— can save a lot of money in the long run.

Make small cutbacks

Cutting a $3.00 cup of coffee out of your daily expenses over the course of a 30-year career would put nearly $33,000 in your retirement fund — and that figure does not include interest that would have compounded for all those years.

Make larger cutbacks

Coffee is a good start, but a far greater impact can be felt in the largest single expense most people have: rent or a home mortgage payment. Choosing a home or a rental at an easily affordable price can provide the budget flexibility to significantly ease the burden of funding a retirement plan.

Lower your investment costs

Another often overlooked way to boost gains is by lowering investment costs. Transaction and management fees are difficult to avoid, but seeking out investments with lower fees will go a long way toward boosting long-term gains. Please note, however, that lower expenses do not necessarily result in higher returns.

2. Take advantage of tax-deferred accounts and employee 401(k) plans — starting now

IRAs, Roth IRAs and 401(k) plans provide a number of options for younger workers to begin building their nest egg. Employers often provide 401(k) matches when an employee enrolls in their plan. Please note that withdrawals prior to age 59½ are generally subject to a 10% IRS early withdrawal penalty in addition to ordinary income tax.

Don’t leave money on the table

While these contributions can range anywhere from 1% or 2% into the double digits, not taking full advantage of an employer contribution by ensuring you are contributing at least enough to get the full match, is leaving free money on the table.

Put away after-tax money

Consider a Roth IRA or Roth 401(k), particularly if you are just starting out and your tax rate is on the lower end of the scale. Investing in a Roth IRA can be advantageous because you can withdraw your contributions tax- and penalty-free at any time, and can also withdraw earnings federal tax- and penalty tax- free, provided you have had the IRA for five years and satisfy one of the following conditions:

  • Reach age 59½
  • Use the funds for a qualified first-time home purchase (up to a $10,000 lifetime maximum)
  • Become disabled or die

The other advantage to a Roth IRA is that if you ever need the funds during an emergency, you can withdraw your contributions without incurring a penalty, unlike your 401(k).

3. Plan to work longer than your parents

The average life expectancy for men and women in the U.S. has increased over the last several decades, and it is important for Gen X and Y to adjust their retirement expectations accordingly.

Delay retirement a few years to build up retirement funds

Planning to work until your late 60s or even 70s is becoming more of the norm than the exception. Working later obviously leaves less time to enjoy retirement, but it also allows more time to build up retirement funds. It also provides the potential for larger Social Security payouts by making sure more working years at higher income levels are factored into the payment equation, and by delaying drawing from Social Security until a later age, which also boosts the payments significantly.

Start building your retirement plan today

Factoring these three simple tips into a retirement strategy — and beginning to execute them now — will go a long way toward helping you achieve an enjoyable retirement for today’s young working generation.

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