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What Millennials Should Know About Their 401k's

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Retirement Planning

July 31, 2020

If you’re a millennial, what can you do to ensure that you save the right amount now and through the rest of your working years to meet your retirement goals?

Millennials are a unique group with money perspectives that vary greatly, from a “super saver” mentality to those who do not even have a 401k and have not made any plans for the future.
The New York Times reported 43 percent of millennials expect to retire before age 65. Another study by the Urban Institute that assessed the retirement outlook for some millennials is not as positive as their expectations, with over 40 percent of millennials expected to have to reduce their standard of living in retirement if they do not make changes.
All working millennials with an employer offering a 401k should absolutely take advantage of the opportunity to invest a percentage from every paycheck.

The essential 401k.

A 401k is a retirement account established by an employer that allows employees to automatically withdraw from a paycheck and invest in funds within the account. These deposits help to reduce taxable income and the money invested in a 401k is taxable upon withdrawal at retirement. Additionally, many employers offer to match a percentage of money invested by employees. For example, if your company offers a three percent match, you should at least be contributing three percent, if not more. If you do not take advantage of this, you are leaving free money on the table that can make a significant difference in money you have saved by the time you reach retirement.

Not saving enough creates retirement regrets.

A study by Fidelity found that almost two-thirds of millennials have nothing saved for the future at all. The purpose of a 401k is to plan for retirement and reduce taxable income too. Relying only on Social Security payments in retirement is not enough security, and by the time millennials retire, it is not known if Social Security will still be available. Counting on a family inheritance is not guaranteed either. In a 401k account, compounded growth over time can significantly increase a retirement nest egg, meaning that diligence in the working years when it comes to investing in a 401k really can pay off decades later.

Saving too much sacrifices too much.

The contribution limits for 401k plans have increased by $500 to $19,500 for 2020. Although, aiming for these limits every year while you’re still in the career growth years may not be necessary or even ideal. For those “super savers,” saving too much in a 401k in the 20's or 30's can sacrifice other important milestones on the way to the retirement years, including buying a home, a wedding or travel. Once money goes into a 401k account, there are penalties for taking it out.

Take the risk early on.

A common mistake that some millennials make is selecting an investment risk level that is more suited to someone in retirement than someone in the early working years of their life. If you earn a modest salary and have a small 401k account, you may be inclined to preserve what is there, but portfolios should not be extremely conservative during growth years, but should be diversified and allocated with a retirement date in mind that is decades in the future to maximize growth opportunities.

Many young adults may be saving more today than five years ago, but many will not be on track to retire in their 60's. The combination of market uncertainty and employment uncertainty means that if you’re a millennial, you should have a 401k and a plan in place to stay on course with contributions. Saving money in the earlier working years of life provides opportunities later in life when having choices becomes highly valuable.

If you’re in your early career years and want to ensure you’re making the right choices to reach your retirement dreams, contact Bayntree Wealth Advisors at info@bayntree.com or schedule an appointment with us today!

‍Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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