Loading the player...

In order for Millennials to be able to retire wealthy, perhaps with at least a million dollars, it is vital that they understand how to use the power of time — or rather the power of compound interest.

A 2016 Government Accountability Office (GAO) reported on how Americans are doing when it comes to saving for retirement. Unfortunately, it was not good news.

The GAO analysis discovered that 60% of all households, had no retirement savings in a 401(k) plan or IRA. In about 29% of the households with members age 55 and older, Social Security provides most of all of the income.

Social Security pays about $1,500 per month — hardly enough to live on, let alone enough to have a comfortable retirement. So what can a 25-year-old millennial – maybe still in school, working part-time or working a low-paying job – do about it?

The Two Key Personality Traits

The millennial march to a million bucks requires two personality traits: self-discipline and patience. 

Self-discipline is 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. Taking part of a retirement plan 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 free money. Also, investing in a traditional 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 left afterward becomes your disposable 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

In order to succeed in investing, you must gain some knowledge. Make yourself acquainted with how stocks, bonds, mutual funds, and the general economy works. Read everything you can until you feel confident in your ability to choose the right assets to create a diversified portfolio. Diversification is important in order to reduce risk. Younger people can afford to take higher risks because they have the luxury of time to make potential losses back. Someone in their 50s or 60s, however, does not. 

Now about that discipline again. Try and stay away from debt 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. Avoid expensive financing of a brand new car, and rather buy 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. At the end of the day, owning will usually be 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 up to $250,000 ($500,000 if married and filing jointly).

Another strategy is to move into your new home,and 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 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?” — Millennial

The problem with this mode of thought is that it is impossible for a younger person 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. Starting in your twenties rather than in your thirties will make a huge difference. 

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.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.