In the endless flow of millennial-focused surveys, one finally stuck out to me.
It came via email from Canadian firm RBC Wealth Management, which found that when it comes to money, millennials are more confident and prepared than previous generations. We feel responsible for understanding our financial affairs and do research to improve our financial knowledge, the survey reported.
I believe all of this is true, which is why I initially overlooked that this survey wasn’t actually about a group to which I belong: It was solely focused on high net worth millennials, specifically 479 respondents under age 35 with average investable assets of $5.7 million. The majority in this group expect to receive an inheritance, if they haven’t already.
So: Rich millennials with rich parents are doing great — financially speaking, anyway. What about the rest of us?
Luckily, there’s no shortage of surveys, many of them bleak but also lacking in concrete data. I suspect we’re doing better with our money than these surveys say, but as within most large demographic groups that have little in common outside of their age and a grating nickname, there’s a wide range of realities. Some millennials are surely struggling; a few apparently count their money by the million.
Where you fall on that spectrum depends on a long list of factors — some in your control, some not. But the good — and, I hope, obvious — news is that you don’t need over $5 million invested by age 35 to have a secure financial future. Here’s what you do need.
A little perspective
Research shows piles of money won’t increase your happiness, but being financially comfortable certainly might. Most people have their own definition of financial comfort, but generally speaking, it helps to stay out of high-interest debt, maintain at least a small pot of emergency cash, and feel like you’re making progress toward meeting your retirement goals.
That last point requires knowing what your goal actually is, and that depends on your current income and retirement expectations. If you’re saving somewhere in the neighborhood of 10% to 15% of your gross income each year, you’re doing pretty well.
People who earn lower incomes can — and typically do — fall toward the 10% side, both because they often have less money available to save and because a greater percentage of their income will be replaced by Social Security in retirement. Higher earners should aim for 15%. If you’re counting on an inheritance, well, you might want to chat up your parents to be sure.
To get a personalized target for how these percentages translate to actual dollars, punch your numbers into a retirement calculator.
A retirement account — preferably a 401(k)
A 401(k), especially one that matches some or all of your contributions, is invaluable when it comes to saving for retirement — so much so that the presence of one should be a factor in evaluating a job offer, right alongside salary. (That’s assuming you have the privilege of evaluating job offers, which is a relatively big assumption, I know.)
Unfortunately, more than a third of workers don’t have an employer-sponsored retirement plan, and millennials are some of the most likely to be in that group, according to an analysis from The Pew Charitable Trusts.
If a 401(k) is off the table for now, there are ways to replicate some of the tax advantages — though not the employer match — with an individual retirement account. The best option for many young people is a Roth IRA, which gives tax-free growth and tax-free distributions in retirement. In exchange, you don’t get a tax deduction on contributions like you do with a 401(k) or a traditional IRA. But if your income is lower now than you expect it to be in the future, a Roth IRA is a better deal, taxwise.
The trouble with IRAs is the low contribution limits, which are capped at just $5,500 a year compared to the $18,000 for a 401(k). If you’re self-employed, you should consider a SEP IRA, which allows you to put away significantly more money each year; up to $54,000 in 2017, depending on how much you earn. Those millennial surveys might have you believe you’ll never save that much; I say it’s good to have the option.
The will to avoid lifestyle creep
Saving 15% or even 10% of your income right now might not be possible, even if you factor in an employer match. The solution is to work your way up to that level as your income increases over time.
The problem is that when income increases, expenses often follow in step. A raise means you can afford a new car, or even just an extra dinner or two out each month. Before you know it, you’re back to where you started, struggling to piece together enough money to save.
When you get a raise, log into your 401(k) or IRA website and bump your contribution up. You don’t have to direct it all toward retirement; half is a fair goal. Once you’ve done that, you can look at how and where you might want to increase your spending. The goal is to ensure you’re always spending and saving according to your priorities, not regularly and blindly ratcheting up your lifestyle.
This article was written by NerdWallet and was originally published by Forbes.
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