Nowadays, millennial’s enter into the workforce and think that they have all the answers. Some of them are little shortsighted by not understanding the impact that their lack of financial literacy will have on their future. To those that do, it is wise to embrace the preparation of retirement.
One of the great assets to achieve a healthy retirement was created in the 1980s. This creation is the 401(k) program which allows you to supplement social security and pension benefits.
Although the name 401(k) may be a little overwhelming to the millennial, there are some steps that a millennial should consider prior to their investment.
The first step is to establish an initial goal. Clearly stated, the millennial should establish an initial amount of money that they would need when they retire. It could be as little as $1 million or as much as they can imagine and then work backwards.
What is meant by working backwards is to begin a payroll deducible contribution that would create momentum like a pebble going down the side of a mountain- it gets bigger by the tumble. It could be as simple as starting off with as little as 5%-10%, which is the consistent recommendation of most advisers.
From here, at your very next promotion, contribute your entire raise to your 401(k). Through the compounding effect and matching contributions from your employer, you get closer to your goal quicker. Once this happens, watch your 401(k) very closely as this is where you should see significant gains every six months.
Keep in mind that you should have some semblance or idea as to the momentum of the general market. A money movement strategy is often utilized to maximize investments. There are times when you should take an aggressive position and other times in a hold position. Most 401(k)s offer different options within the investment vehicle.
Not contributing to a 401(k) is one of the worst errors that a worker can make, according to Jay Hunt, a retirement consultant of Unified Trust Company (US News, 7 Ways to Fix a Flawed 401(k) Strategy, Rebecca Lake, Contributor, Sept. 19, 2019, at 2:38 p.m.).
The best way for a millennial to avoid the cataclysmic effect of not contributing is to contribute in the beginning. Katie Taylor, Vice President of Thought leadership at Fidelity, shares that the most important behavior, for a 401(k) to be maximized, is to start saving early (CNN.com, More people are saving $1 million in their 401(k)s. Here’s how you can too, by Katie Lobosco, May 29, 2018: 10:56 AM ET). Excellent advice!
Don’t make that the mistake that the Baby Boomers made by not starting early. Katie Lobosco continues that only 3% of Baby Boomers with a 401(k) at Fidelity had $1 million in their accounts. Millennial’s don’t let this be you!
Now there are times when you may need a loan to get through some of the leaner times. By taking advantage of some of the advice that has been given, you now have a self-funded financial resource with a low interest rate which is outstanding.
In addition, a late payment it is not reported on your credit report. Young or old, maintaining a healthy credit rating goes a long way in the financial world.
As you progress in your career and your finances increase, Innovative Advisory Group’s Kirk Chisholm, wealth manager, recommends that you stay a little bit uncomfortable with your 401(k) contributions and make an effort to stockpile cash- specifically your goal of attaining at least $1 million by the time you retire (CBSNEWS.com, What to do in your 20s and 30s to be set in your 60s and 70s, By Megan Cerullo, May 3, 2019, 2:27 PM, MoneyWatch).
In short: stay disciplined and committed to reaching your goal.