The path to retirement is believed to be pretty straightforward. If we work for a few decades, save up our money, and make solid investments we should be able to reap the rewards of our disciplined lifestyle during retirement. But rarely do things go as planned. Life's twists and turns, such as starting a family, paying for college, buying a home, or covering expenses tied to an unexpected illness, can derail our perfectly envisioned plan. Nonetheless, that doesn't stop our pursuit of the so-called "finish line."
Knowing that reaching retirement is a key life goal of most Americans, Merrill Edge, which is a component of Bank of America, commissioned a study on more than 1,000 mass affluent Americans (most of which have $50,000-plus in investable assets, or $20,000-plus and annual income of more than $50,000). The purpose of this study was to discover what it is that today's millennials are seeking in retirement, as well as get perspective from today's retirees to find out what retirement has been like for them.
The findings, especially when contrasting the differences between millennials and current retirees, was eye-opening.
Retirement, as envisioned by millennials
More than half (53%) of all millennials in the survey viewed retirement as something exciting, which is not what was noted among current retirees. Millennials were more likely to pursue a passion, further their education, or start their own business in retirement, when questioned.
When surveyed about what expenses might be like in retirement, 28% of millennials cited daily expenses as their projected dominant cost, ahead of managing healthcare expenses and housing expenses, which each earned 17% of the millennial responses.
As the report points out, "For millennials, retirement is more than a time for rest and relaxation -- it's a time full of possibilities."
What retirement is really like, as told by retirees
Merrill Edge's survey also questioned retirees to get a feel for what surprises they may have encountered. One particular question concerning what they'd done that they didn't expect to do in retirement was very telling. A whopping 30% of retirees (the top response by far) announced that they'd "spent more money than they anticipated." Another 19% moved to a new location and 18% proclaimed feeling a "lack of purpose."
Retirees' top priorities were also markedly different from millennials who expect a world of possibilities to await them in retirement. The top priorities of retirees included simply maintaining their current standard of living (29%), spending time with loved ones (27%), and maintaining their health (23%). Further, of the nearly one-in-five millennials that hoped to make world travel a priority in retirement, just 5% of today's retirees have prioritized traveling.
A common denominator?
If there is a common denominator among millennials and today's retirees, it may be that quite a few aren't/didn't prioritize saving and investing enough.
In fact, Merrill Edge's survey approached this by asking everyone what aspect of their life they're most insecure about. Pretty much half (48%) of those surveyed chose some aspect of their finances, such as their financial future, retirement savings, or income, as the biggest insecurity. Retirement savings was among the top individual insecurities if we narrow things down a bit, with about one in five (21%) respondents listing it as a major concern.
Furthermore, when questioning millennials about their financial discipline and resolve, only 18% would give themselves a grade of "A" when it comes to prioritizing retirement savings. On the flip side, more than double (38%) would give themselves a grade of "C" or lower when it comes to being proactive about their retirement planning.
Three retirement issues that millennials clearly need to work on
What Merrill Edge's survey shows us is that while expectations for retirement continue to evolve, mistakes continue to be made. There are three major "kinks" that millennials will need to focus on if they don't want to wind up like the majority of today's retirees who appear to be less than excited with the way things turned out.
1. Getting the most out of your budget
First, as you probably surmised from the discussion above on retirement savings proactivity, today's millennials need to do more to be better savers.
To some extent millennials deserve some credit, as T. Rowe Price's Retirement Savings and Spending Study released last year showed that three-quarters of millennials closely track their spending, with 67% sticking to a budget. That was a notably higher figure than baby boomers. However, a third of millennials not budgeting their money, or sticking to their budget, still leaves us with a non-passing grade and plenty of room for improvement. If millennials don't have a good grasp on their cash flow, they won't be able to optimize their saving or investing habits.
The easiest way to rectify this is by taking around 30 minutes each month to understand your income and expenses so you can optimize your ability to save with a budget. The best news of all is that budgeting software can help tackle the unpleasant components of budgeting (i.e., the adding and subtracting), leaving you to simply enter the data and decide how to set as much as possible aside for future investment.
It also may not hurt to keep money for separate categories (i.e., entertainment, food, and so on) in a separate account, so you don't feel tempted to spend it. If you operate your budget and savings from a single bank account, it can make it difficult for consumers to separate the two, thus making it hard to stick to your budget. Weekly, bi-weekly, or monthly automatic withdrawals to an investment account may help as well.
2. Reviewing your goals early and often
Secondly, Merrill Edge's study suggests that millennials need to be better about regularly reviewing their financial goals.
In the past, financial goals could be established when you were entering the workforce. Today, though, with life expectancies increasing nearly every year and retirement priorities shifting, millennials have to be more proactive about revisiting their financial goals to ensure they remain on track to hit their retirement number.
If you've been maintaining and sticking to a budget, I'd suggest you're probably on par or ahead of your peers in terms of reaching your retirement goal. But remember that budgets aren't static. Your expenses can change for a variety of reasons, as can your income, which means your budget may need some active tweaking on a month-to-month basis. In other words, you need to remain an active rather than passive participant in your own retirement.
How do you do that? Ideas here might include visiting with a financial advisor once, or a few times, annually to discuss your retirement goals and the actions taken to reach those goals. Also consider bouncing ideas off close friends and family members who may also need that extra reminder. Just remember that no matter who you bounce your ideas off, you remain in control of the path your retirement takes.
3. Consider your various tax implications
Finally, the fact that nearly one in five retirees in Merrill Edge's study said they moved to a new location could signify that they did so for cost and/or tax purposes (note, Merrill's report didn't specify the reason for the move, so this is pure speculation on my part).
Taxes can catch retirees off-guard if they aren't ready for them, which means it's probably a smart move for millennials to begin thinking about minimizing their exposure to taxes during retirement as early as possible. For example, a Roth IRA allows Americans to invest for their retirement and not owe a single cent in taxes on investment gains. The catch? You'll have to wait until age 59 1/2 before you can begin making withdrawals, and you'll need to meet certain income requirements that tend to adjust with inflation. If you net $1 million in investment income over a four-decade period, we could be talking about $200,000 or more in tax savings with a Roth IRA.
Deferring your taxable income in a 401(k) or Traditional IRA can also be helpful to allow your money to grow. However, it'll mean you'll need to plan your withdrawals carefully in retirement to ensure you don't withdraw too much each year and put yourself into a higher income tax bracket.
Millennials should also take into consideration that where they retire can affect their tax situation. Certain states tax Social Security and retirement benefits heavily, while others don't tax them at all. Understanding how the state where you choose to retire taxes various components of your retirement income can have an impact on your nest egg.
The good news is, millennials do have time to turn things around to get the retirement they desire, but the longer they wait, the harder it's going to be.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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