More than half of the American millennial population are in debt. Please, hold your gasps of disbelief. A week doesn’t pass without a journalist or blogger commenting on millennials drowning in debt. Whether it’s from credit cards or student loans, we’re facing a serious problem. Yet, Wells Fargo released a 2013 report stating 61% of millennials see themselves as “savers.” Umm, Please.
Why am I a skeptic? Because too many of my fellow millennials have been resistant to start saving for their retirements. Maybe they’ll save up for a large purchase, but why aren’t people taking advantage of employer matched 401(k) accounts or in the absence of a 401(k) option, opening an IRA?
- I don’t make enough money.
- I need to pay down debt.
- I don’t trust the stock market.
- I’ll worry about it in the future.
- I don’t understand them.
Those are a few of the answers I’ve received from my peers. As a fellow millennial, I’m not here to bash those who feel justified in their decisions to procrastinate preparing for their future. Hey, it’s your choice and I’ve been there. However, I hope people make an informed, rational decision not an emotional one. Those first four answers usually means the person is a lost cause, for now, and the conversation ends.Then my face looks something like this (on the right):
Don’t understand them? Well that’s easy to fix.
“A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.” – IRS.gov
Oh sorry, did your eyes just glaze over? I don’t blame you. In millennial speak it’s translated to, “you invest some of your hard-earned cash and (hopefully) your employer matches your contribution up to a certain percentage.” Essentially, your company is offering you free money, usually because you don’t have a pension plan.
If you don’t have a full-time job, your company doesn’t offer a 401(k) or they do and the match/investment options are terrible then consider an IRA.
IRA stands for Individual Retirement Arrangement, a pretty straight forward acronym. Similar to the 401(k), an IRA is the vehicle to invest in a variety of options including stocks, bonds, mutual funds and even nontraditional options like real estate or precious metals. However, an IRA (typically) isn’t matched by your employer.
There are two* basic options for your 401(k) and IRAs: traditional or Roth. A traditional account gives you a tax break now. Your money will be invested before taxes and you’ll owe the government money when you withdraw your funds in retirement. A Roth does the opposite, you’ll pay taxes now (which means it doesn’t lower your taxable income) and smirk at Uncle Sam when you’re old and wrinkly (or retire early).
Additionally, the Roth IRA comes with income limits. In 2016, if a single (as in unmarried) millennial has to be making less than $117,000 to contribute up to the limit ($5,500 for 2016) or less than $184,000 if you already got hitched. The traditional IRA gets capped based on income and whether or not you (or your spouse) are covered by an employer-sponsored 401(k) at work. In 2016, you get no deduction if you are covered by an employer and have an adjusted gross income (AGI) of more than $71,000. The IRS does a fine job of breaking down the difference between a traditional and Roth IRA in this handy chart.
If none of these points make you want to budge consider this: consistently contributing to your 401(k)/IRA, making wise investments and maxing out an employer match is one of the simplest ways to become a millionaire.
*Okay, there are more but we can get into SIMPLE 401(k)/IRAs and SEP IRA/ Self-employed 401(k)s another time.
The post originally ran on May 30, 2013. It has been updated to reflect current numbers.