There is a growing tendency among Millennials to delay “real life” during our 20s. The conventional wisdom exacerbates the notion that this period of life is for self-exploration, living on the edge and finding oneself. The importance of developing financial security – please – that is for old people to worry about. Since our parents grew up in one of the richest generations in US history, who can blame us for this mindset? If our parent’s lives were better than their parents, then logic only dictates we will be financially better off than our parents. Therefore, it’s asserted, let’s enjoy our 20s because everything will work out in the end, and we won’t get these years back. Yes, that’s true, you won’t get them back. While we can’t reclaim our youth, it’s also true you won’t get back the 88K you stole from yourself by not being financial prudent during your 20s.
As Millennials, we have been raised to question everything. So now, let me pose some questions to you: What if your 20s is actually the most important period in your life to begin saving, stashing money away for retirement and paying off debt? What if the laissez-faire attitude towards personal finance is not actually what it seems to be? What if by being financially savvy in your 20s you can actually set the bedrock for a stable future that allows you to, indeed, carry the generational torch and live beyond your parent’s financial health?
Your 20s, folks, is exactly just that. It is the key period in your life where you have the capacity to build the basis of your financial freedom. In fact, according to Meg Jay, psychologist and author of The Defining Decade, “The foundation you build in your 20s will define the rest of your life. Take yourself seriously.”
The average college graduate starts full-time work at 22 years old. That means there are eight glorious years to tackle debt and save money before you hit the dreaded 30s. If the average Millennial contributed maximally into both a Roth IRA and Individual IRA during those eight years, they would have $88,000 (ignoring the time value of money) saved for retirement by the time they turn 30. That’s some serious cash.
Let’s consider how we arrived at this number of $88,000 for our retirement savings accounts. A Roth IRA is a retirement savings account that allows you to contribute post-tax money and your money then grows tax-free. The annual contribution limit in 2015 to a Roth IRA, depending on your income, was $5,500. In contrast, an Individual IRA is a retirement savings account that allows individuals to contribute pre-tax money and the savings growth is tax deferred. The annual limit for an Individual IRA in 2015 was also $5,500. Therefore, if you contribute maximally to both accounts you end up with an annual savings of $11,000 towards retirement. Thus, by the time you are 30, if you have maxed out your Individual IRA account and Roth IRA for eight years, you would have a balance of $44,000 in each account.
Considering, the median account balance of an Individual IRA in 2013 was roughly $32,000 and the median balance of a Roth IRA was roughly $15,000, you will have more savings than half of all the adults actually saving for retirement! That is huge! If you continue this trend of yearly savings, your retirement nest egg will grow and you will actually have a sustainable retirement.
Planning for the future doesn’t have to be a dreaded aspect of “growing old’. It can be an effortless process. Similar to how income taxes are taken out of your paycheck before you see anything hit your bank account, your retirement savings should be an automated process. Ramit Sethi, financial expert and author of I Will Teach You To Be Rich, argues “More than anything else, the psychology of automation is critical to successfully getting control of your finances.”
As Millennials, we grew up in an age of explosive technological growth – let’s use this to our advantage. If you set up an automatic deposit from your paycheck into your retirement accounts, the pain of the savings process is diminished and the act of saving is now, as those in the payment processing profession say, frictionless. Automating the savings process increases the success rate of continued savings and the practical aspect of acclimating to a slightly lower paycheck might take about a month.
All of this is not to say that you shouldn’t enjoy your 20s. What it does mean, however, is that if you begin to control your personal finances early, the downstream effects of good financial habits will pay huge dividends for the rest of your life. Automate your finances starting in your 20s and you will accelerate your path to financial freedom. Keep your 88K and this whole “adult” thing starts looking a little easier.