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- When you're in your 30s, it can be overwhelming to think about how much money you'll need 30 to 40 years from now in retirement.
- Instead of setting goal savings or retirement age numbers, I encourage millennials to focus on developing the good financial habits they'll need later in life, including budgeting.
- Getting into the habit of saving before you spend on "fun" is also a good idea — budget out your annual savings and automate it to your accounts.
- Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »
For a person in their 30s (or even younger), it can be daunting to think about the kind of person you will be and the things that will be important to you 30 to 40 years from now. And being told that you need to determine exactly how much money you expect to spend on a monthly basis once you get there can be equally overwhelming.
For that reason, I think the financial advice industry tends to miss the mark when it comes to addressing the planning needs and concerns of the millennial generation.
For a 35 year old, retirement is likely 30 or more years away. Plenty of life will happen between here and there. It is less important to perfectly map out the exact date when you will retire and how much money you will need to have accumulated by then and more important to focus on honing the financial habits that will lead you to a point where you can comfortably afford to retire when you would like to.
Track your cash flow and map out a budget
Develop a habit of tracking your cash flow and focus on how much you are spending on a regular basis. It is not necessary to take inventory every day. However, a great exercise is to sit down at the beginning of each year and develop a budget. Then, revisit that budget halfway through the year. Be honest with yourself about whether you are on or off track, by how much, and what needs to be done to be successful by year end.
You likely have some idea of what you will earn each month after taxes, insurance, and any other withholdings coming out of your paycheck. From there, you can script out your fixed costs for things like housing, transportation, and utilities. Then, you have some idea of what will be available each month for savings. This is your starting point.
Factor in your savings goal before you budget for fun
By design, nowhere in that budget breakdown was a line item for fun things like eating out and going out. That is not meant to signal that fun is not an important element to living a life that is fully balanced. Instead, it is important to set a savings goal for the year and script out how you will reach it prior to allotting what is left over to fun.
Since the natural inclination is typically to do the inverse — only save what is left over after having had "enough" fun — it is just as important to automate the amount being transferred to savings every month in order to make sure that the human element gets left out of the process.
On the road to being a diligent retirement saver, it is also important to avoid the ubiquitous pressures to keep up with the rich and famous lifestyles that your peers purport to be living via social media. Spending money you do not actually have in order to impress people you do not actually know is a dangerous habit to build. Being in a constant cycle of using this month's paycheck to pay for last month's purchases will inevitably erode any savings that do exist by the time you make it to retirement, and can also make it tougher to retire on your own terms.
When it comes to saving, a great place to start is by making sure that you are taking full advantage of the various retirement planning tools available to you, such as your employer's retirement plan and an Individual Retirement Account. Many employers offer a match — up to a point — on any contributions that you make to the plan on your own behalf. At the very least, any person in their 30s should be contributing enough to receive the full matching amount that their employer is willing to offer. Any failure to do so is simply leaving money on the table.
You have to expect for retirement to last more than 30 years and plan accordingly. With the advancements that have been made in technology and modern medicine to date, it is more realistic that a person in their mid-30s today, who retires in their mid-60s, can expect their retirement to last almost 40 years. And it is unrealistic to expect Social Security or any other government-sponsored program to sufficiently pick up the slack.
The concept of longevity risk refers to the idea that a person could outlive their retirement savings and not have any viable means for generating an income in their later years. For this reason, when it comes to retirement, it is important to emphasize planning for the worst (saving early and often) and hoping for the best (having slightly more saved than you will live to spend). For most people, life lasts a long time. But as anyone who is already retired will tell you, it also moves fast. So, do not underestimate how soon your own retirement will be here, nor how long it will last.
Malcolm Ethridge, CFP, CRPC, is an executive vice president and fiduciary financial advisor with CIC Wealth Management.
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