Often, advice from trusted professionals is shunned by this young sect. As of 2012, only 19 percent of Millennials said that, generally, others can be trusted! Unfortunately, in their opinion, everything that can’t be found on Google, Amazon, or Ebay isn’t worth buying. However; some life decisions should be pondered after careful consideration with experienced professionals.
Although employment models are changing, society still dictates that there is a logical progression to “growing up.” You study hard, finish school. You make it through a copious number of interviews and land a job. You then quickly realise that you are an adult. Trust me, the thrill begins to wear off quickly as you sit down with an HR manager to talk through the benefits your employer is offering and that you are now responsible for enrolling in. At this point you may slump over with your heart racing and your head spinning.
Unfortunately, this is a best-case scenario for many twentysomethings. Every generation has its own set of challenges and adversities to conquer, but the current crop of so-called Millennials, face a uniquely challenging environment. Of those who graduated college between 2006 and 2010 many are struggling to find full-time work, and with a youth unemployment rate hovering around 25% this leaves retirement planning sitting at the bottom of most to-do lists. Even those with jobs are likely thinking about how to hold onto them or about what the next job will be—not about retirement. On average, it is believed that people now in their twenties will go through seven jobs in their lifetimes. Long-term financial security is not their primary objective.
Where do you start?
Every Millennial has heard the paternalistic “you have to save everything you can for retirement” speech delivered by someone who cannot relate to the current salary or economic situation. Realistically, retirement planning isn’t the first thing on everyone’s minds and trying to convince someone to do something that is decades away is nigh on impossible (even if it is in their best interest).
While you don’t have to save everything you can today, it is important to get started. If you keep thinking “it can wait until later,” you’ll wake up one day when you’re 55 and find yourself scrambling to figure out how you’re going to live in your retirement years. Don’t let that be your future. Take a few minutes and start contributing and planning for your retirement today.
With my own step-son having just entered the work force for the first time I feel your pain and I offer these 10 practical tips to any millennial embarking in employment for the first time and some practical suggestions for people in their twenties as they dive into retirement planning:
- If your Employer offers a scheme, get to know it.
You don’t need to work in employee benefits to be knowledgeable about your company’s plan, and you don’t need to know it inside and out. But you should be able to answer these simple questions:
- What kind of scheme is it – PRSA or Defined Contribution?
- Are you taking full advantage of your company’s match?
- When will you be eligible to join the scheme?
- Will your employer automatically enrol you with a set deferral percent if you don’t make an affirmative election one way or another?
- What type of investment options does it offer?
- When can you begin to contribute?
- When will you have vested rights?
- No one else is going to fund your retirement…contribute, contribute, contribute.
Access to a Defined Benefit pension scheme is very rare for people in this generation. Millennials are at the forefront of the generations who will need to fund their retirement solely on the basis of what has grown in their PRSA’s (Personal Retirement Savings Account), Personal Pension Plans, or some other plan to which they must contribute. Even though your budget may be tight, every euro you can spare now could be worth much more by the time you retire. While most will recommend that you contribute the maximum amount possible, it may not be realistic for person who makes €30,000 to contribute €4,500/€6,000 each year. (Tax relief for contributions is subject to age-related percentage limits which are: if you are under 30: 15%, if you are aged from 30-39: 20%)
Figure out how much money you can spare each pay period after you pay your expenses, and contribute what you can. There are online calculators to help you understand the impact on your pay cheque (http://www.platinumfinancial.ie/retirement-income-calculator/). Don’t be discouraged if you can only save €50 a month or 1% of your compensation. You’ll be glad you made the effort when you’re nearing retirement. The longer you have your contributions invested, the longer you have to take advantage of the compounding of interest on your investments.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
― Albert Einstein
- Increase your deferral percentage every time you receive a raise.
You were surviving on your income prior to the raise so you’ll manage without seeing the extra income hit your bank account. Think of it this way: If you never see the money, you will never miss it.
- Establish a Retirement Savings Account.
If your company doesn’t offer an employer-sponsored retirement plan, look into contributing to a PRSA or a Personal Pension. All employers are obliged by law to provide you with access to a PRSA provider and must operate deductions from your payroll if you request it otherwise consider a Personal Pension which may offer broader investment options and you can claim the tax relief yourself.
- Take The Free Money!
How can anyone not be enticed by anything labelled “free”? If your company has a Defined Contribution Pension Plan and are offering a percentage match, take full advantage of the free money. While many companies offer different matching rates, some offer 5% of salary if you match their contribution. In other words, if you contribute 5% of your pay cheque, your company will contribute an additional 5% to your retirement plan (this is essentially a 5% pay increase).
- Consider your own risk/reward tolerance taking into account the amount of time you have until retirement.
Everyone has a different comfort level with investing. The way your parents or friends invest may not be the right fit for you. Don’t know what kind of investor you are? Any advisor worth his salt will conduct a risk profile questionnaire with you to determine what types of investments fit your risk tolerance and time horizon.
- Know when the money will be yours.
When will you be 100% vested? In other words, how long do you need to stay with the company in order to attain full ownership of the employer contributions? You are always entitled to the contributions you make but most companies follow a vesting schedule for employer contributions. This means that you may be required to work a set number of years to be entitled to the contributions your employer makes on your behalf. Money that you do not “own” according to the vesting schedule will be forfeited back to the employer if you terminate your employment before you have reached full vesting.
- Don’t consider your pension as a glorified savings account.
In nearly all cases retirement saving plans have restrictions on when you will be allowed to draw down your benefits with different plans having different rules regarding distributions while still employed or following termination of employment. Understand that your contributions are a long term commitment and it may be many years before you get the use of it again. Review plan description and consult with professional to determine your best options.
- Move your accounts with you.
Don’t worry if you have had multiple jobs or if you know you don’t plan on staying at your current job for much longer. You can make contributions while employed, and when you move to the next opportunity you may rollover your account to your new employer’s plan or to a PRSA or a Personal Retirement Bond. Some plans have restrictions on what can be rolled in so you’ll want to check with your new plan administrator for any restrictions.
- Most importantly—budget and live within your means.
Between car payments, insurance, rent or mortgage payments, wedding planning, and all the other bills, it’s hard to willingly give up whatever money is left from your pay cheque. Most people in their twenties can afford to contribute to their retirement savings account; it’s just a matter of finding the funding and the willpower to do it.
Now is the best time to look forward and start taking charge of your own financial future.