Your Bank > Education and Advice > CNB University

Retirement Plan Considerations for the Millennial

D Cator 2014
Donna L. Cator, CFP®, CDFA®
Vice President, Wealth Advisor
[email protected]
(585) 394-4260 x50623

Every generation has to plan for retirement, each having different obstacles to overcome. For Millennials, those born between 1981 and 1996, there are multiple challenges. Remaining focused on a retirement that could be more than 40 years away is tough, particularly while your hard earned paycheck is competing with rent, student loans, a car payment, and a social life. The message here is: keep your eye on the prize and follow these tips. 

1. Invest for an 80 year time horizon

You entered the workforce during the “lost decade” with the 2000 - 2002 stock market downturn and the 2008 financial collapse. You probably heard parents, friends and colleagues speak in fear about the stock market. But looking ahead, your long time horizon affords you the ability to invest more aggressively in stocks which likely will provide for higher long-term returns and the time to ride out market declines. Despite what you may have heard, stock markets work. 

The decades ahead of you can be your greatest advantage due to time and the compounding of your money. Compounding is essentially earnings on your earnings due to reinvesting. Here’s an example: at age 25, you begin investing $3,000 per year. At age 65, $120,000 would have been invested. If we assume a 6% average annual return, you would have accumulated a total of $464,286. Alternatively, if you wait until age 35 to begin investing that $3,000 annually, you would have invested $90,000 and it would have grown to $237,175. That’s a difference of nearly a quarter million dollars! 

Start now with whatever amount you can afford and invest with a tilt toward stocks. A good target in your early twenties is to save 10%-15% of your annual salary. Each year when you receive a raise, increase your contribution by 1% of salary until you reach the target.

2. Which takes priority: retirement savings or paying off your student loan debt?

We all hear the headlines about the student loan debt crisis. Millennials have borrowed more to attend college than previous generations. While you must pay this debt on time, find a balance between saving for retirement and making the payments. As your salary increases, increase your debt payments and retirement savings. Remember, you were able to borrow for college, but you cannot borrow to fund your retirement goals. 

3. Save in your Employer Sponsored Retirement Plan

If your employer offers a retirement plan, such as a 401(k), take advantage of this easy way to save. Initially, contribute enough to obtain the company match. That’s free money! If you have a Roth 401(k) option, consider contributing all or a portion to the Roth. Unlike contributions to a traditional 401(k) plan, Roth contributions are made after-tax. Such investments, once in a Roth account, can grow and are shielded from income taxes forever – as long as certain rules are followed. The goal for retirement is to have a mix of tax free, tax deferred, and taxable buckets.

4. How to handle your 401(k) when changing jobs

Millennials are known to change jobs often. You should consider the pros and cons of keeping your money in your current employer plan, rolling it into your new employer plan if allowed, or rolling it over into the appropriate traditional or Roth IRA. What you should not do is take the cash! 

5. Establish a Roth IRA

Having a Roth IRA outside of your Employer Plan is a good idea. It will allow for a tax free bucket of money if your employer doesn’t offer the Roth 401(k) option. In addition, because there is typically a timeframe that has to be met before you are able to contribute to an Employer Plan, it provides you the ability to still save for retirement.

6. Fund an emergency savings account

Millennials should save until they have at least 6-12 months' worth of expenses. This cash reserve will get you through the unexpected times if, say, you lose your job or have a medical emergency. Research shows that Millennials are more likely to borrow against their 401(k)s in an emergency when they should be accessing an emergency fund first. Set up a savings account that you don’t have easy access to for this purpose and have 10% of your paycheck automatically deposited until you reach your 6-12 months' goal. 

7. Consult with a Financial Expert

It can be overwhelming to navigate your financial future on your own. How much will you need in retirement? Can you buy a home? Will your student loan debt ever get paid off? With sound financial planning, you can overcome all these challenges. Our experienced team at CNB Wealth Management is here to help you navigate the next steps on your path to retirement.  

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.