Millennials' Guide to Retirement Planning

As a millennial you’re young, crushing it at work, and living your best life—so retirement planning might seem like something you can tackle in a decade or two.

But retirement will come around sooner than you think. So if you start saving now, your money can grow exponentially over the next few decades, ensuring you can live your “next” best life in your golden years.

In this blog, we’ll provide a road map of retirement planning for millennials that will explain the importance of starting retirement planning early, the different types of saving options to choose from, and how Oxford Federal Credit Union can help you reach your retirement goals.

When Is the Best Time to Start Putting Money Away for Retirement? 

The straight answer is—yesterday! You might think that’s a bit dramatic, but financial experts would say the same. Why? Because of an amazing financial phenomenon called compound interest.

When you put money in accounts specifically designed for retirement savings, the money can earn compound interest. Compound interest is the interest earned on both the original amount saved and the interest that has already been earned, so it can lead to greater returns over time.

So even if you put a nominal amount of money into a retirement account while you’re in your 20s or 30s, your funds will grow exponentially over time. This is why you should start saving for retirement right now! 

Why Setting Goals Should Be Your #1 Goal 

Retirement seems pretty far off when you’re a millennial—we get that. But we also know that your generation is goal-oriented. So, let’s talk through the importance of setting retirement savings goals early on and how to determine what your personal ones should be.

To start, try to envision the type of retirement lifestyle you see yourself living. Ask yourself questions like:

• Would you like to move, perhaps to a warmer climate or out of the city? 
• Do you plan to stop working completely upon retirement or would you rather phase out in stages? 
• Are you thinking about starting a new career or maybe a small business? 
• Would you like to leave money to family members or a favorite charity?

So how do you determine the amount of money you need to save to achieve your retirement lifestyle goals? A retirement calculator is a great tool to help figure that out.

After you enter basic information like your current age, annual pre-tax income, and money you’ve already put aside in savings, the calculator runs the numbers and generates a suggested annual contribution amount. This baseline is a very helpful target to keep you on track for reaching your retirement goals.

Retirement Savings Options 

So now that you know the importance of saving early on, let’s look at different types of retirement accounts, keeping in mind that you’re not limited to just one account. 

Individual Retirement Account (IRA)

One of the most common accounts, a traditional IRA is a personal retirement account that provides tax benefits and a range of investment options.

With a traditional IRA:

• There are no income limitations when opening an account, meaning anyone with any salary level can open one.
• The IRS sets annual contribution limits.
• You can grow your money tax-deferred (i.e., you don’t have to pay annual taxes on it), but you must pay standard income tax on any money you withdraw.
• If you withdraw funds before you turn 59 ½ years old, you must pay a penalty fee.
• At 73 years old, you must start making withdrawals. 

Roth IRA

A Roth IRA is another popular retirement account but is slightly different from a traditional IRA. 

With a Roth IRA: 

• There are income limitations.
• The IRS sets annual contribution limits.
  
• To withdraw earnings without taxes or penalties, you must be at least 59 ½ and the account must be open for at least 5 years - or you must meet specific exceptions like disability or first-time home purchase.
• Unlike a traditional IRA, you fund it with money that has already been taxed.

401(k)

The Power of a Diversified Portfolio

A diversified portfolio incorporates different types of investments rather than being strongly reliant on only one kind.

When you invest in multiple retirement income streams, you’re diversifying your retirement portfolio. For example, if the company you work for offers a 401(k) plan, you should consider participating in it since, as we mentioned above, most companies will contribute to your account.

However, traditional and Roth IRAs can be set up separately from your company’s retirement plans. Therefore you could have a 401(k) while contributing to an IRA as well. Since any investing comes with a margin of risk, diversification can provide a safety net because your money is spread across different types of accounts. 

The Oxford Federal Credit Union Difference 

At Oxford Federal Credit Union, the health of our members’ financial future is our top priority and we offer various IRA options to accommodate your individual needs. Plus, when you open a Traditional or Roth IRA with us, you’ll enjoy no annual fees and competitive dividend rates.