As a 24-year old law student, one of the last things I worry about is saving for retirement. I worry substantially more about my law school grades and finding a full time job after graduation, and rightfully so, as the first step toward retirement is a career that can fund one’s life and retirement savings. However, having a basic understanding of where one needs to go to retire and how one should get there is vital even before accepting that first job.
Before my internship experience working at National Life Group, retirement was a distant, far-off land where if I took consistent advantage of a company 401(k) match and saved a little on my own I would one day arrive. I never stopped to consider the discipline and consistency required to adequately prepare oneself for life after their career, which is consistently growing longer and longer. These are a few of the things I have started to consider as I move toward accepting my first full-time job.
Today, on average people retire at 63 years and have an average retirement of 18 years, with one in four individuals who retire at age 65 living to 90 (that’s 25 years of retirement). Individuals used to have little incentive to save beyond their working years, but due to the growth in life expectancy that is no longer the case. Using the Social Security life expectancy calculator at 24 I am currently expected to live to an age of 82 years old. If I make it to 65, then I will be expected to live to 87 years old. Thinking about retirement in those terms can be overwhelming. Holistically, this increase in life expectancy means younger workers are responsible for saving much higher shares of their income than previous generations, especially when considering the uncertainty regarding Social Security. Furthermore, millennials in many cases are saddled with student loans making it harder to put away money right now for retirement.
Young adults entering the work force should also consider how approaches to retirement savings have changed compared to our parents and how we can do better than our parents. Gone are the days where an employee worked continuously with one or two companies and retired with a pension or one large retirement employer retirement plan. Workers ages 25 to 34, per a recent Department of Labor study, have a median tenure of 3.2 years–less than a third of the tenure of workers aged 55 to 64. This means that younger workers need a greater understanding of their employer-sponsored plans benefits both while they work for that employer and after their departure. For many, understanding the options that employers provide for encouraging tax deferred retirement savings is the first step toward building a comprehensive retirement savings plan.
Workers, young and old, may not understand the benefits/drawbacks of rolling over their account into an IRA or keeping it in an old employer’s plan. Rolling over to an IRA can often be beneficial, especially for many millennials, who have yet to purchase a home (you are technically eligible for this exception as long as you have not owned a home in the past two years), this comes with the added ability of allowing a non-penalty taxed withdrawal of $10,000 total against the cost of buying, building or rebuilding a home, as well as most settlement financing and closing costs. When used for a qualified purpose such as this, you avoid the 10% penalty tax, but you will still owe ordinary income taxes on the amount distributed. These kinds of considerations are likely to be more important to younger savers than previous generations due to their higher job turnover rates.
Luckily, it is not all gloom and doom. Millennials as a group have outperformed older generations in retirement readiness. With 58% already actively saving for their retirement years and 40% with over $10,000 saved for retirement. When compared with the older Baby Boomers where 50% of them have saved over $10,000 for retirement, despite 20 plus years in the work force the millennials have a substantial head start. At National Life Group I have been exposed to fixed indexed annuities which are great retirement options and can help younger workers save toward retirement. Having grown up during the Great Recession many of us saw our parents lose much of their retirement savings due to the volatility in the stock market. Fixed indexed annuities provide annuity owners with guaranteed* principal, meaning that the accumulated value will never lose money due to market changes as long as no withdrawals are taken during the surrender charge period. Furthermore, fixed indexed annuities can provide guaranteed life time income protecting against the previously mention longevity risk of outliving traditional investment savings.
The groundwork is there for the younger generation’s retirement savings. We understand the importance and moving forward with consistent planning, dedication and great retirement products many of us have the opportunity to have a more secure retirement than previous generations. The pieces are there if our generation will only spend some time and think about the road ahead.
Statistic Brain 9/25/16
Planning For An Uncertain Life Expectancy In Retirement, Forbes, 2/3/14
Life Expectancy Calculator, ssa.gov 9/25/16
What Social Security Will Look Like When You Retire, Fox Business, 9/22/14
Bureau of Labor Statistics, 9/25/16
Millennials and Retirement, DaveRamsey.com, 8/22/16
Millennials Want in on Annuities, USA Today, 6/29/15
Because they are meant for long-term accumulation, most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. In addition, withdrawals prior to age 59 ½ may be subject to a 10% Federal Tax Penalty. All withdrawals made from annuities with pre-tax contributions are taxed as ordinary income. All withdrawals from an annuity purchased with non-qualified monies are taxable as ordinary income only to the extent there is a gain in the policy.
Indexed annuities have surrender charges that are assessed during the early years of the contract if the annuity is surrendered. Indexed annuities do not directly participate in any stock or equity investments.