The Millennial’s Guide to Saving for Retirement

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Dear Reader/Future Retiree/Humans and AIs,

I’m saving for retirement, because I’d like to retire one day. I’m loving this early stage in my career as a real-estate attorney, and I expect to continue loving it as I develop my practice and become an expert in the field.

And while I expect to have some level of activity in real estate until I die, I do hope (and am planning) to retire and enjoy a greater proportion of leisure and non-career pursuits than I’ll be able to while working full-time.

It’s for this reason that I began socking away — actually it was in a tape ball — money earmarked for retirement when I was 6 years old.

I do realize that I’m lucky in this aspect and that not everyone has the means to save toward retirement at 6 — heck, not everyone has dispensable cash at 50.

But I began to get why saving early and often mattered when I saw the following graph (the one with purple and green lines). If I habitually socked away some money I earned from jobs and got at Christmas and my birthday starting at age 20, I’d be able to retire in comfort at age 60. (But since I plan to live to 250 now, obviously, I plan to work to about 90.)

So in case you have similar ambitions to retire one day and want to start acting on them now — by putting away whatever you can — here’s some knowledge from a finance major who loves spreadsheets.

The basics of saving for retirement

Q: Who should save & when should he/she start?

Everyone within their means and immediately.

Everyone means even recent (or not-so-recent) grads who are paying off student loans. It may be especially important for those recent grads, typically around 25 years of age.

At a fixed rate of return, investing $5,000 per year from age 25 to 35 ($50,000 total) will yield a greater nest egg at retirement than investing that same amount from age 35 to 65 ($150,000 total).

So, it’s quantifiably a lot better to save right now for 10 years than it is to wait “until I’ve paid off some of these loans” or until “after I buy a house” than it is to start saving at 35 until you retire. (Hence, the immediacy.)

Q: How do I save?

“Investing” is such a big, ambiguous, scary word if you weren’t raised with it and didn’t study it in school. But here’s all it is: putting some of your dollars to work for you.

Your dollars can work by putting them into certain accounts and owning investments.

Depending on which retirement account you choose to invest in, your options for investments will change.

Q: What types of retirement accounts are there?

IRAs are “tax-preferred” accounts, meaning they are taxed differently (i.e. the government favors them) than regular investment accounts.

Like fine wines (e.g., Franzia), IRAs come in varietals. The first is a “Traditional” IRA, and it allows someone to contribute pre-tax dollars into the account and let it grow until retirement, at which time the earnings are taxed when withdrawn.

The second is a “Roth” IRA, and it allows after-tax contributions, which will grow until retirement and can be withdrawn tax free.

This all boils down to deciding whether you think your tax rate will be lower right now or after you’ve had a full career and are about to enter retirement.

The conventional wisdom says young professionals have lower income, and therefore lower taxes than they’ll have in retirement, when they may have multiple sources of income and higher taxes.

In addition, however, you should consider that tax laws will likely change, as they are want to do, and that although they may change to your advantage (and it would have been cheaper to pay taxes in retirement than right now), there’s also real value to the peace of mind not having to worry about it with a Roth IRA.

No matter what the tax laws are in 2081, the stated balance of my Roth IRA will be the amount I’m entitled to receive — sans taxes.

Depending on your place of employment, 401(k)s and 403(b)s are retirement accounts that make it easy to put aside money directly from your paycheck.

Best bet — ask your HR person about your options and if your employer matches contributions. But if your employer doesn’t offer matching, make no mistake — you still have the full benefit of the tax-preference treatment, so not contributing solely because your employer doesn’t match would be a mistake.

If you’re self-employed, your option looks a bit different: a SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) looks more like an IRA than a 401(k), in that you can invest in a bigger universe of investments not restricted to those offered by a 401(k) provider.

Q: How do I open one of those non-employer accounts?

Opening an IRA is as easy as identifying a brokerage company via Google (some big names are Fidelity, Vanguard, Charles Schwab, E*Trade, and many others) and then filling out their online forms and questionnaires. While speaking with a financial advisor may be advisable for some, these accounts are 100% accessible to a non-Finance-major.

I would regret not at least mentioning a new category of brokerage accounts known as “robo-advisors.” These financial tech (“fintech”) companies offer services built around computer automation and analytics.

Typically, the fee and commission structures of robo-advisors is much lower than traditional brokerage companies, and they offer most of the same services. They’re v exciting. Some of the big names are Wealthfront, Betterment, and PersonalCapital.

Big picture from the Finance Major Next Door

If you’re looking to get the most bang out of your bucks, putting money into all of these tax-preferred accounts is a great way to do it. And if you start saving now — whatever age you are — you’ll be better off for it.

So, around year 2081, think of me as I’ll be unwrapping that tape ball to make my first retirement withdrawal and begin enjoying those leisure and non-career pursuits.

Disclaimer: the rate of return inside of a tape ball is near zero, and, as such, I do not recommend it as an investment vehicle.

Free download

This free downloadable, customizable retirement savings spreadsheet will let you estimate how much you need to save in order to meet your retirement goals.

Just fill out the information you know (like current age, age you wish you retire, how long you expect to live), and the spreadsheet will drop some knowledge you might not know (like how much you need to save each year so that you’ll have enough money to live until you kick it, but still have enough money to leave an inheritance).