Retirement possibilities are different for employees today than 50, 30 or even just 20 years ago. In the past, a person could invest a percentage of their income into a retirement account with an equal contribution from their employer. They would work for thirty years, retire at 65 and play golf every day for the rest of their lives. Unfortunately, times change. With increasing inflation, lesser benefit opportunities arise and fewer employers offer equal contributions. At this point, a comfortable retirement seems almost impossible for someone just entering the workforce. Despite this tough reality, with the right planning, it is possible for Millennials to build a nest egg to support themselves during retirement years.
Finances for Millennials: What Is a Nest Egg & How to Build One
The key to a comfortable retirement is the same as it has always been; build a growing nest egg while you are working so that you can live comfortably when you retire. Millennials, however, have a lower savings ratio than any previous generation, which puts many young workers at risk. A significant percentage of Millennials simply expect to live check to check and work for their entire lives.
Fortunately, it doesn’t have to be this way. By having a great plan and forming consistent money management habits, even Millennials can put away funds effectively to enjoy a work-free retirement.
The Millennial Nest Egg: What Is It?
In simple terms, a nest egg is a sum of money that is put aside for a long-term goal, such as buying a house or living a comfortable retirement. Nest egg funds are built over time by investing in a strong portfolio that includes financial assets such as savings accounts, CDs, bonds and other conservative instruments.
Historically, the most popular vehicle for building a retirement nest egg has been through an employer-offered 401k, where both the employees and their employer would invest a specified amount of money at each pay period. Today, however, an increasing number of companies refuse to contribute at the level that was once expected, if they choose to participate in their employees’ 401ks at all.
Compared to other generations (Generation X and Baby Boomers especially), investment into 401ks is significantly less for Millennials. A 2014 survey by the TransAmerica Center for Retirement Studies, found that while 81% of Baby Boomers and 84% of Gen Xers participate in 401k programs, only 71% of Millennials participate. This study also found that while 74% of Generation X employees had access to a 401k plan, only 62% of Millennials have access. For millennials to succeed in the way that other generations have,, we must take a more proactive approach. In short, an individual must allocate a greater portion of their income towards building their nest egg.
Timing Vs. The Nest Egg
The beauty of a properly structured nest egg is that it can grow exponentially through compound interest. Therefore, timing is of the utmost importance. Those who begin investing early are able to grow their nest eggs much larger than those who start later.
Compound interest means gaining interest on interest. Upon earning interest, it is added to the principal amount in the next investment period. Here is a simple example. If $1,000 is invested in Year 1 with a 10% interest rate, it will earn $100 at the end of the investment period. In Year 2, the principal amount becomes $1,100 (principal plus earned interest), making the second year’s return equal to $110 instead of $100. As time goes on and the principal amount becomes larger, interest will begin providing an even greater annual return. Compound interest works best when it has TIME to work, meaning that those who start early will reap the most significant benefit.
When it comes to compound interest, when you begin saving is often more important than how much you save. Consider the following table of three Millennials who invest at different periods.
|Nest Egg Value at Age 65||$602,070||$540,741||$1,142,841|
As shown, the absolute best way to maximize your nest egg is to start early and make consistent, long-term investments. Although Michael invested $100,000 more and invested over a longer period of time, compound interest allowed Kyle to build a far more valuable nest egg. Your retirement fund needs time to work and build, so start as early as possible!
5 Steps To Building A Nest Egg
Maybe you’ve missed your chance to start investing in your nest egg at the ripe age of 25. However, what’s most important is that you begin now, no matter what age you are. Ready to start investing in your nest egg to ensure your eventual comfortable retirement? Here are five steps to make sure that you make the most out of your retirement plan.
Maintain a Consistent Income:
Many Millennials believe that you need a huge income to build a nest egg. However, keeping a steady income is more important to making contributions in a steady manner. According to Wells Fargo, by sticking to a routine of retirement plan contributions that grow over time with compound interest, a 25-year-old with a yearly salary of just $32,000 can reach the $1 million plateau by age 65.
Invest Money into a Tax-deferred Vehicle:
It’s important to put a portion of your funds away, but it is most important to put it somewhere where it will grow without much risk. Ask your employers what type of 401k or IRA programs they offer. Check to see if they offer employer contributions so that you can grow your nest egg even quicker and with a lesser personal investment.
Increase Contributions with Each Raise:
As you advance in your career and your income grows, make sure to increase your retirement contribution as well. This ensures that your retirement portfolio stays reflective of your financial position, and helps to guarantee that you will not have to decrease your lifestyle after retirement.
Be Disciplined and Patient:
In the beginning, your nest egg will seem small and slow growing. As mentioned, compound interest needs time to work. It is critical that especially during this stage, you do not give up or falter on your plan. Be patient and continue to invest at the level and consistency that you committed to. After a number of years, you will begin noticing significant advances in the growth of your portfolio, but only if you continue to invest patiently while your nest egg becomes established.
Initially, it is wise to maintain a conservative portfolio to protect your investment while it gains footing. Over time, however, it may be a smart decision to diversify your portfolio with more aggressive investments, which if successful, will provide a much greater return on your investment. But, keep in mind, that a more aggressive portfolio means a riskier portfolio, so always do your due diligence before deciding to diversify your investments.
For Millennials, there are many ways to start investing in a nest egg. First, ask your employer if there are any 401k options that are offered through your company. Some Millennials avoid employer-based investment plans and choose to invest on their own. Apps like Acorns and Betterment make it simple for individuals who want to invest without an employer program.
The most important step is to commit to a plan and get started. Get started now to really maximize your nest egg. Time is of the essence!
Matt Collins is a financial educator and the founder of LoansNow. With over 15 years’ experience in the personal finance industry, Matt has worked with thousands of individuals to help during emergency financial situations.