Today I want to teach members of the Millennial population how to retire wealthy, perhaps with at least a million dollars. It is vital that Millennials understand how to use the power of time in their financial march to a million.
The Government Accountability Office (GAO) recently reported on how Americans are doing when it comes to saving for retirement. Unfortunately, it was not good news.
The GAO analysis discovered that almost half of households with members age 55 or older, had no retirement savings in a 401(k) plan or IRA, and nearly 29% have neither retirement savings nor a traditional pension plan. In about half of the households with members age 65 and older, Social Security provides most of the income.
Social Security? Do you really want to live on $1,500 a month in your later years? Of course you don’t. So what can a 25-year-old Millennial – maybe still in school, working part-time or working a low-paying job – do about it? Is buying a lotto ticket or marrying someone from a wealthy family your only hope for attaining wealth in your retirement years?
The Two Key Personality Traits
The answer is no. But your Millennial march to a million bucks requires you to develop two difficult personality traits: You need to have self-discipline and you need to have patience.
When I mention self-discipline I am referring to the ability to defer immediate gratification and instead to think first about saving and investing your money. It’s recommended that you save 15% of every paycheck, no matter how small or large it may be. If your company has a 401 (k) plan with a company match, sign up immediately for it. It doesn’t mean you have to work there forever. When you leave your job, you can take the money you've saved with you. (See article: Money Habits of the Millennials.)
The amount the company matches is like a 100% return on your money. Plus, investing in a 401 (k) plan will lower your taxable income because the 401 (k) money comes off your full paycheck amount, and then you are taxed on only the remaining money.
So the march-to-a-million plan necessitates that you invest first and then pay your bills. Any money that is left afterward becomes your spendable income, or fun money. Most young people do just the reverse. They spend on fun first, pay bills (often late) and then they invest…..well, nothing, since there’s no money left after the first two activities. Then at age 65 they wonder where all the money they earned over the years has gone.
Next is where patience comes into play. You won’t get rich overnight by investing 15% of your salary. The wealth-building process is a slow, gradual one that takes place over decades. It’s the proverbial tortoise beating the hare over the long run. (See article: How Gen Y Can Avoid Working Forever.)
Where to Put Your Money
But what should you invest your money in? How do you know you won’t lose all your money? In order to succeed in investing, you must gain some knowledge. Go to the library or buy several books – and read online – about stocks, bonds, real estate, precious metals and mutual funds. Read everything you can until you feel confident in your ability to choose the right assets to create a diversified portfolio. Diversification is important because often one asset class will go up when another goes down, so being diversified keeps you from losing a large portion of your portfolio at any time.
Now about that discipline again. You must stay out of debt if you want to march to a million bucks in your lifetime. Debt will keep you a slave to your job and poor throughout your life, especially if it is debt that’s attached to depreciating items, such as cars, boats, computers, cell phones, and other technology. Debt means paying out additional money in the form of interest. Never finance a new car. There’s nothing wrong with buying a top-quality car that is 2-5 years old; by year five that new car has depreciated by more than 60% of its original price.
Save enough money to buy a modest first home. Find one that costs even less than what the mortgage company will allow you to buy. Many bargain-priced homes can be found on auction sites such as Auction.com. If you do this, owning will be far cheaper than renting. Over time, your equity in the house will grow. Live in a home for two years or more and you pay no taxes on the profit you make when you sell.
However, another strategy is to move into your new home, but keep your first home as a rental property. Over time, your tenants will pay down your mortgage in full and then you will create additional income for yourself in retirement.
I have had Millennials tell me, “I don’t want to make sacrifices while I’m young just so I can have more money in old age. I want to be able to go on vacation and buy a nice car and clothes now. What if I don’t even live to an old age?”
The problem with this mode of thought is that it is impossible for a Millennial to experience life as an elderly person until they get there, so they have little knowledge of how impoverishment will feel when they are 80 or 90. Personally I feel there is nothing sadder than watching an elderly person, after a lifetime of work, digging through their pockets in the supermarket to find that 10-cents-off coupon. There is no need to live that way if we plan ahead and have self-discipline and patience.
While I’m sure there are senior citizens who regret not having had more fun in their youth. I’m also certain that a much larger percentage of them, who are living on nothing more than Social Security fixed incomes, wish they had saved and invested more over their lifetime.
The Bottom Line
The choice is yours. But the sooner you start, the sooner – and likelier – you will arrive at retirement with a million bucks! (For related reading, see article: Retirement Planning the Millennial Way.)