Why you need to start now
The days of getting a job for life with a secure pension are long gone. Nowadays, you'll have to rely much more on your own initiative to create pension arrangements, especially if you're planning on early retirement.
When you're young, it can be difficult to appreciate the importance of planning now, but the earlier you start, the better your standard of living when you do eventually retire. Anytime you get a financial windfall, you need to make the most of it—see what financial experts would do with extra cash.
James Barnash (SGL Financial), former president and chairman for the Financial Planning Association, feels millennials are in a very strong position to cope with the uncertainties around financial planning.
"Millennials look at the world and life differently," he says. "They don't have great dependence on what the government will provide down the road, so they know they're going to need to fend for themselves. And they'll be very creative."
His advice for people starting their careers is the same as it would be for older generations, but the advantage with them starting now is that they have plenty of time to benefit from their early efforts. Here are ten things millennials should start doing now:
Pay down your debt
"This is a group that's going to have a lot of student loan debt," says Barnash. "And so paying down that debt is important."
Paying off other debts, such as credit cards and consumer loans, is also a critical first step, otherwise you'll be paying unnecessary interest that could otherwise be put towards your savings.
Start paying in yourself
Barnash has over 35 years experience in advising people how to save, and he believes that beginning to put money aside should be done hand-in-hand with paying down your debt. "If you only give them the hard thing to do—pay down the debt—but don't give them the reward of putting some money aside, it's more difficult for them to accomplish their goal," he explains.
Begin saving regularly, even if it's only a minimal amount—try using these 17 habits of people who are great at saving. You'll be surprised how much that adds up to as time goes on. Start to use a 401k at work, and make the most of any employer-matching benefit. Again, it doesn't have to be a large amount to start with, as the interest on even small amounts will mount up over the years. Starting now lets you maximize the amount you save and the interest on those savings.
"It's the time that you have for that compounding effect to take place," says Barnash.
Start an emergency fund
You never know how life might surprise you, and sometimes events can blow a hole in your budget unexpectedly. The car may need replacing, you fall in love with the home of your dreams, or a once-in-a-lifetime investment opportunity comes along. Says Barnash: "Start putting some money aside so that you can take advantage of that opportunity at that point in time."
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Build a three-legged stool
The concept of a three-legged stool in finance is a long-standing one: Have three strong pillars to your financial plan. Barnash believes that Social Security will still exist, but your 401k and personal savings are more important now than ever, and he also warns about changes to tax regulations which will affect your financial planning—learn from retirees what they would have done differently with their money.
"I think this is the generation that's going to need to save more, to do a better job than their parents have done," he emphasizes. "So paying taxes now, putting money aside, and saving and investing it makes a lot of sense—it's about building that three-legged stool."
Diversify your investments
A broad range of investments is also an important component to your planning. Here you should think big. Sticking to a narrow portfolio of domestic investments could hamper your ability to turn a profit. Barnash advises millennials to "make sure that they're invested internationally, taking advantage of where opportunities are throughout the world, not just in the U.S. or in Europe." Here are some more 12 common retirement mistakes to avoid.
Owning real estate is another form of investment that Barnash thinks millennials should consider, whether that's private rental units or commercial property. Most people doing well today either have a good pension or have passive income from investments in real estate. But it's important to understand that real estate is a long-term investment opportunity, rather then a chance to make a quick buck by timing the market.
"I think investing in real estate would certainly be a wise thing to do," says Barnash, "And then stay the course."
Protect your family and assets
Things may be going swimmingly now, but you never know what's around the corner, and there is a chance that your lifestyle could change overnight. So protecting your family and your assets in case the worst should happen is not only the responsible thing to do, but it will help protect your budget planning too.
Health insurance, life insurance, and disability insurance can make all the difference if you do suffer a life-changing events. Income protection is also an important aspect to consider—how well could you manage, and for how long, if you suddenly found yourself unable to earn? You should also protect your home and your car, and Barnash also thinks that liability coverage is worth considering in today's "litigious society."
"Insurance is pretty inexpensive," says Barnash. "It's not something people are happy to think about, talk about, or spend money on, but it can be a lifesaver in certain situations."
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Consider tax-free income
For baby boomers, good financial planning was all about deferring taxes, but Barnash believes that time has come to an end. "I think paying the taxes now and doing Roth accounts make the most sense," he says. And it's also worth considering specially designed life insurance products that offer more flexibility than traditional accounts where your funds are locked away and can't be touched. If you're considering a career change later in your working life, or hoping to retire early, these products may be a better choice.
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Create a passive income stream
Creating a passive income stream is a great way not only to give you income when you retire, but also to help boost your funds as you're saving. This could be from investing in real estate, but today's entrepreneurial millennials are exploring a host of ways to generate passive income on the side, while continuing to work at their day jobs.
"I think that is a key element, especially if you want to retire early." says Barnash. "Having that passive income is going to be a great benefit." Check out these ideas for creating passive income.
Live within your means
"This one is very boring," quips Barnash. But living within your means is critical if you're serious about retiring early. The finer things in life can be fun to have, and many people aspire to them, but too much indulgence will backfire. Barnash describes people he knows who have very little in the way of savings and investments, yet have spent large sums of money on maintaining a luxurious lifestyle. "They have four or five cars, they own big homes and take fancy vacations," he comments. "But they'll have to work forever because they don't have any money put aside."
However, he's also seen people who have lived very modestly on limited incomes. Now they've retired early and are "happy and enjoying life in retirement." See our tips on how to set a budget you can really stick to.
Leave yourself flexibility
Life is uncertain—making financial plans for early retirement makes good economic sense, but Barnash cautions against getting locked into a retirement plan with no flexibility. Rules and regulations may change, the economic environment and your life circumstances may change, so it's important to leave yourself some "wriggle room" to allow you to respond to these changes without sabotaging your finances.
Barnash has clear advice for millennials as they plan for their early retirement: "Being flexible, and being broad in scope, provides you with confidence no matter what happens," he says. "Whether changes are economic, physical, or emotional, you will have the ability change direction without suffering a lot of damage, and then continue on."