Millennials, I urge you to take action toward a specific goal today: Increase your income, protect your assets and prudently maximize your earnings through investing with diversified risk and long-term growth. If you do not want to retire in poverty or be forced to work in retirement instead of enjoying the freedom to pursue your life goals, you need to have more than a million dollars saved by retirement.
As a result of the eroding force of inflation, a Baby Boomer retiring today at age 67 with $1 million in savings generates an average annual withdrawal of only $40,000 per year. With the same $1 million target, the amount you will generate annually is less the younger you are. Individuals who are currently 42 and plan to retire at age 67 will generate an average of only $19,000. Based on the future value of money, for Millennials who are currently 32 and plan to retire at age 67, the average annual withdrawal from $1 million in savings will be below the poverty line.
Why Millennials Need More Than $1 Million
Every year, the value of currency goes down. The Federal Reserve intentionally aims to keep inflation at about 2%. This means cash sitting in a checking or savings account with a return less than 2% will lose value every year. (For related reading, see: How Inflation Affects Your Cash Savings.)
How Millennials Can Save More Than $1 Million
It may seem daunting to think of saving more than one million dollars. Even with more time, Millennials often feel strapped by limited cash flow, high debt, or career and business ventures that have not paid out as hoped. However, there are ways to cut back on your spending to start investing. Simply contributing the maximum amount to a Roth IRA—$5500 as of 2018—can generate $1 million due to compounding returns (assuming a moderate return of 8% compounded annually, not counting inflation).
Consequences for Millennials Who Put off Investing for Retirement
Waiting just a couple years to start saving for retirement can cost hundreds of thousands of dollars in opportunity cost and missed gains, and delaying only 10 years can cost a couple million dollars. If you put off saving for retirement by investing wisely, you will miss out on the way wealth can positively change your life. Wealth is more than money—it is exponential leverage that enables opportunity. Wealth is freedom to spend more time with family, make a special purchase or help someone in need.
The opportunities are eliminated when cash flow, low assets, or high debt remain an issue, especially later in life. While working longer is actually a smart idea, you may want to have the option of not having to work the rest of your life.
Keep in mind that qualifying for government assistance like Medicaid typically requires spending down assets to about $2,000 with a meager monthly allowance remaining for personal spending. On March 14, 2016, Time magazine published a report from Go Banking Rates showing 72% of Millennials have less than $10,000 saved for retirement.
The free market of supply and demand typically links income with academics and marketable skills, so take action to increase your education and leverage finance options to reduce costs while supporting quality. Earning more and spending less than you may originally planned could be critical to your success.
Failing to plan is planning to fail. Regardless of your past, harness the love you have for your current or future family and create an action plan that gives you the opportunity to support all of your dreams. (For more from this author, see: Take These 8 Key Steps to Financial Success.)