Did you know those in their late 20s-to-30s have built up less wealth than previous generations had by the same age? The reason, cited in 2021 Boston College research, is student loan debt. Inflation, rising rents, and soaring medical expenses are also contributing factors, according to a multi-generational survey conducted by Deloitte in 2022.
It’s no wonder that roughly 47% of Gen Z and Millennials report they’re living paycheck-to-paycheck while approximately 30% say they don’t feel financially secure. 43% of Gen Z and 33% of Millennials say they’ve had to take a second job just to make ends meet.
Investing what you can, when you can
While massive debt and increasing expenses make it tough for younger generations to sock away 10-15% of their annual income, as financial planners recommend, it’s best to get in the habit of saving as much as your circumstances allow.
In the beginning, this may mean opening up an interest-bearing savings account where you can park funds until you need them. Bankrate.com says the average interest for most savings accounts is 0.13%. Though that won’t exactly grow wealth, it’s better than nothing for those who need to keep their money accessible in case of emergency.
As your financial footing becomes surer, you could consider making modest monthly contributions via an employer-sponsored 401(k), a personal IRA/Roth IRA, or a robo-advisor account. You could also hedge your bets, keep your funds liquid and make an annual contribution directly from your savings account — but not one so large that it’d wipe you out.
CNBC suggests you’ll eventually want to get to a point where you can set aside a minimum of $14/day, or $420/mo., to invest for retirement. But before you wonder if that’s enough to carry you through your golden years, let’s talk about compound interest. It’s the main reason you’ll want to start saving as early as possible.
Let’s use that $14/day example to illustrate how compounding works. If you’re able to put away $420/mo. and earn 5% interest, you might think you’d only save around $200,000 over a 40-year period. But in actuality, you’re earning interest on the money you’ve saved and the interest you’ve already earned. It’s like receiving interest on top of interest, which can exponentially grow your money. So if you put away $420/mo. for 40 years — with a return of 5% — you’ll have more than $620,000. That’s at least $420,000 in free money!
No-brainer strategy #1: contribute to an employer-sponsored 401(k)
Speaking of free money, the 401(k) offered as part of your benefits package may come with employer matching. In 2022, Investopedia found that the most common employer match is 50 cents on the dollar, up to 6%. Now that you know about the power of compound interest, it’s easy to understand the impact that an extra 6% can have.
Even if your company doesn't offer matching, 401(k)s are a terrific investment vehicle for those getting started. They really don’t require much market knowledge as you have the option to select a target retirement age. With target-date funds, an asset manager will make risk decisions for you and automatically rebalance the fund to be more conservative the closer you get to receiving a disbursement.
No brainer-strategy #2: open an IRA or a Roth IRA
Another retirement savings vehicle is an Individual Retirement Account (IRA). With a traditional IRA — or a traditional 401(k) — you won’t have to pay taxes on whatever you contribute until you start making withdrawals. Many financial planners recommend a Roth IRA where contributions are taxed up-front because you’d likely pay a higher tax rate later in life. If you anticipate being a high earner throughout your career, a Roth IRA is the smart choice.
No brainer-strategy #3: use a robo advisor
Wealthfront, Betterment, Acorns, and Allio aren’t explicitly for retirement savings, but each can be used for such. You don’t get the tax benefits of a 401(k) or an IRA, but you can always withdraw funds at any time without penalty — something that could come in handy during a job loss, home purchase, or another big life event.
These companies offer various investments: stocks, bonds, ETFs, and perhaps crypto. Some investors will want to do the heavy research required to pick out individual stocks, bonds, ETFs, or cryptocurrencies. Still, others will enjoy the breeziness of going with the custom portfolio a robo-advisor has carefully assembled.
Out of all of these strategies, there’s really no bad way to invest. Honestly, the worst thing you can do is nothing at all.