Confessions of Future Retirees: Learning About IRAs and Other Savings Options for the First Time
Before coming to Millennium Trust as summer interns, we felt we had a pretty decent grasp on how to handle our money. But alas, after weeks under the wings of Millennium Trust’s experts, we realized our current general focus on short-term financial needs would not serve us well in the long-term.
Like many people our age, other, more immediate expenses, such as rent, tuition and food, are at the forefront of our minds, while the prospect of needing funds to cushion an emergency or save for retirement seems like problems to be faced later on.
To us, “financial wellness” meant maintaining a bank account with enough cash to fund daily activities. Little did we know, financial wellness includes so much more.
The Holes in Our Financial Knowledge
According to a survey administered by Personal Capital, over 75% of respondents said their parents influenced their own financial habits as adults.
Parental influence that leads to good financial habits is a wonderful thing. Unfortunately, nearly two in three respondents with bad financial standing also claimed their parents influenced their financial habits.
The American school system often does a poor job in teaching financial literacy and does not help kids and young adults form beneficial financial habits or gain an understanding of financial concepts. In fact, less than half of U.S. states require high school students to take a class in personal finance.
Hannah, a rising junior at the University of Wisconsin-Madison, had no knowledge of retirement savings accounts other than the pension funds offered to those working for the city of Chicago. Having only been exposed to this kind of retirement planning, Hannah didn’t realize there are many different vehicles available to save for retirement, each with different tax advantages and benefits.
As it relates to short-term savings, Hannah had witnessed family members in need of emergency funds that were nonexistent. While these family members were willing to admit they needed to save more for unexpected expenses, understanding how much to save and committing to a consistent plan to reach that goal is a different matter entirely.
Lucas’s financial savviness was not much better, although the rising senior at the University of Illinois recently discovered that he in fact owns a Roth IRA and invests in growth funds within it.
He’s started early, which is great! However, he did not understand the difference between a Roth and traditional IRA or truly understand their importance until beginning work at Millennium Trust. Lucas now realizes the benefit of currently contributing after-tax funds.
A New Perspective
Through learning about Millennium Trust’s retirement services and meeting with individuals across the company, we have quickly picked up on the dire importance of saving early and the basics that everyone should know about saving for retirement or unexpected events – particularly as they enter their early twenties.
We now reflect on what we considered “financial wellness” before interning at Millennium Trust, with the condescending but empathetic smile of a parent about to deliver a life changing lecture to a child. How naive we were!
If you or someone you know has no idea where to start when it comes to building retirement savings knowledge, we have a few tips for you to consider.
- Start young. This point cannot be emphasized enough. Starting a school assignment the night before it’s due and managing to beat the deadline is applause-worthy. However, the same tactics do not apply to retirement planning and saving.
Saving early and often is an easy way to reduce stress and find comfort in knowing you are building a strong financial foundation for your future self. Plus, you can find joy in watching your money grow on its own simply from compounding interest!
- Do your research. There are plenty of resources for you to build your saving and investing knowledge, including Millennium Trust's Preparing for Retirement through the Years: Building a Solid Foundation in Your 20s video.
Whether you have a retirement account and don’t know it or have no idea what the difference is between a Roth IRA and a traditional IRA, carving out a little time in your schedule to explore and understand your options is critical.
- Begin contributing to a 401(k) ASAP (if you can). According to a 2014 TransAmerica Retirement Survey, over 80% of Millennials are concerned that they will not be able to claim Social Security when they reach retirement. And that doesn’t even begin to consider Gen Z.
If you have access to a 401(k) plan at work, it’s important to contribute, and contribute enough to receive the full employer match. Why wouldn’t you want free money? You’ll definitely thank yourself later.
- Don’t assume that saving for retirement or unplanned events isn’t plausible for you. For example, alternative retirement savings plans to 401(k) plans exist for smaller businesses who cannot afford to match dollar-for-dollar or manage the administrative burden of traditional retirement plans. Many small businesses assume they can’t afford a plan, but affordable and simple options are available.
Additionally, when it comes to emergency savings, experts recommend having three to six months of living expenses saved. This will help act as a cushion from having to dip into your retirement savings and face larger financial consequences, should an emergency occur.
If that amount of savings sounds daunting to you, starting small is the best way to go. Often getting started is the hardest part!
Learn more about saving and investing options, by visiting our Knowledge Center
The material in this blog is presented for informational purposes only and does not constitute investment, legal, compliance or tax advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not provide due diligence to third parties on prospective investments, platforms, sponsors or service providers, and does not offer or sell investments or provide investment, legal or tax advice.