If you’ve read anything in the news about what a millennial retirement will look like, you’ve noticed a widening preparation gap between millennials and their predecessors at a similar age. Why is this?
Stated simply, most millennials don’t get excited by the prospect of delaying gratification and saving consistently to reach some eventual goal 40+ years in the future. Blame long-term unpredictability and social media.
Instead, we want a more fulfilling life. We want financial independence without having to follow a traditional retirement path. Truthfully, we just don’t know what tomorrow will hold.
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As a result, we’re more inclined to delay gratification a bit less than our predecessors and indulge more. YOLO (you only live once), right?
And while this might be true of our generation, there are some other frictions millennials have with preparing for a traditional retirement.
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Namely, the amount of student loan debt we took on and the low wages most of us have come to accept. We also have a tenuous relationship with work because we can’t seem to find it as easily as our predecessors. Instead, we’re forced to learn new skills, take up side hustles or find other ways to save more if we have any hope of getting ahead.
This is where I see the opportunity for millennials to redefine what normal retirement will look like. I don’t foresee us sailing off into the sunset to leave everything behind like so many boomers hope to do.
I see us using unique skills and experiences to sidestep solely pursuing traditional corporate advancement. I see us forging our own way. I see us pursuing financial independence as a means for reaching our millennial retirement.
Financial independence and millennial retirement: redefining the concept
For the reasons laid out above, the retirement definition will need to shift for millennials. That’s partly because when you look at the amount of millennial retirement savings, the results aren’t great.
But it’s also because we can’t expect the same financial support programs that have helped others. We don’t have the guarantee of a social safety net there to catch us if we fall behind.
The truth is, we don’t know what may come to pass- but it likely isn’t the status quo, because our country can’t afford it. Because of these trends, our retirement plans must change.
Further, with difficulty seeing what’s in our immediate future, let alone 40+ years down the road, we face hard money decisions our forebears simply didn’t.
For most of us, we’re caught in a conundrum of deciding if we should invest or pay off student loans. And homeownership? Once we escape the realm of affording more than condo or apartment living, maybe someday.
How many baby boomers had to navigate the best student loan refinancing offers or the Federal student-loan system writ large? My guess would be a lot fewer than us.
Baby boomers went to school in droves at affordable prices. They managed to make respectable livings by advancing their careers, earning pay raises, and saving money along the way.
And those who didn’t? About 25% of baby boomers cite having a pension available to them. Many will also receive Social Security and maybe have a bit tucked away in their 401(k) and individual retirement account (IRA) plans.
This isn’t to say all boomers will live comfortable retirements. There are many who still need to work to make ends meet because they don’t have enough saved for retirement.
In comparing millennial vs. baby boomer for retirement preparation, the point I am trying to stress is we are forced to rely more on our own preparation for our retirement than our predecessors.
We are a generation forced to make its own way in the world- more so than baby boomers or Gen-Xers. And most important- it is up to us to seize this challenge and capitalize.
We need to begin taking concrete steps toward realizing our financial independence. And because efforts tend to compound, we need to start acting sooner rather than later.
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3 strategies to reach financial independence
• Control our spending
The easiest dollar earned is the dollar not spent. Controlling our spending is the surest item within our control and is the biggest lever we can pull to increase our savings rate.
• Invest money
Conventional wisdom says to reach a safe retirement by the age of 67 (current age for full Social Security benefits), you should save 15% of your income for 40+ years. If you want a more comfortable financial situation, I’d suggest tripling that savings rate. Consider investing in index funds, diversifying in real estate with advantageous MACRS depreciation and other tax deductions on 1231 property.
• Create multiple income streams
All things equal, passive income represents a superior type of income to active income because you do not work for it. Rather, it accrues whether you sleep, vacation, or fall ill. Also, specific types receive the same preferential tax treatment as long-term capital gains under an advantageous passive income-tax rate. Creating multiple income streams diversifies financial resources and places you closer to financial independence.
To reach financial independence, we should have investments and income streams which produce enough income to cover our cost-of-living and leave room for rises in the cost of living.
If we’re lucky down the road, we can throw in slimmed down Social Security and Medicare benefits for good measure. Learning to invest, develop lucrative skills, and build passive income streams which work for your benefit is the surest path to a secure millennial retirement.
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Financial independence means having no regrets
I wonder how many current retirees look back in regret about having worked a job they didn’t like for so many years and wished they’d done things differently? My bet would be a lot.
Life doesn’t often give you mulligans, so I don’t intend to postpone my satisfaction in the hopes of one day reaching a traditional retirement. I want to pursue financial independence and have the financial freedom to do what I want.
If millennials are smart, we’ll learn to hustle and save. This is what many of us will have to do to enjoy a millennial retirement. This is also the way to get what we want most of all: living life on our own terms.
Riley Adams is a CPA and the author of the Young and the Invested website, which focuses on financial independence and investing. This column was adapted by the author from a post on that site.