From Today's Earnings to Tomorrow's Equity: How to Save for the Long-Term

May 3, 2018

Retirement. When you hear the word, you probably think of some vague milestone decades in the future that has no real consequence on the life you’re living in the here and now.

You’re not alone in that sentiment. But it turns out that you’re also not alone in your commitment to save,  even if you barely grasp this whole retirement idea. That’s because, contrary to popular belief, millennials are actually pretty good at the whole saving thing.

A Bank of America report found that nearly half (47%) of millennials have $15,000 or more saved, and one in six has more than $100,000 in savings. “It turns out that millennials are actually just as good, or better, than other generations when it comes to managing money, and they are getting their financial houses in order,” said Bank of America’s Andrew Plepler, global head of environmental, social and governance. The report also found that 73% who have a budget stick to it most of the time, and that 67% of those with a savings goal do the same.

So yeah, it would seem that millennials know a bit about budgeting and saving—both of which contribute to a solid foundation for preparing for retirement. Where they tend to get hung up, though, is in understanding how to create a strategy that takes them from today’s earnings to tomorrow’s equity.

While many think that simply putting money in the bank is good enough, they’re falling short when it comes to harnessing the power of investments, compound interest, and other money-growth strategies to build their nest egg. Erin Lowry, author and founder of Broke Millennial (a resource that’s definitely worth having in your arsenal if you’re even the least bit serious about conquering your finances), confirms this: “I have found [that] so many millennials are incredibly overwhelmed by the topic of investing,” she said in a recent panel discussion at SXSW. “They don't understand that if they're contributing to a 401(k), they already are investing.”

This should be good news for millennial workers in the private sector, where the 401(k) and other defined contribution options are usually the de facto employer-sponsored retirement plans. But many employers still require employees to opt in in order to take advantage of the plan. In other words, if you don’t take the initiative, you don’t invest anything. (This isn’t an issue in PERA’s system, however, since all PERA employees qualify for and are given access to a defined benefit plan starting on Day 1 of employment.) If you’re a member of the growing gig economy or start-up space, chances are an employer-sponsored retirement plan isn’t even an option. This means the responsibility to set up a personal retirement savings plan—for example, an IRA—lies squarely on your shoulders. No wonder millennials are intimidated.

If you’re a millennial who’s currently saving but unsure how to channel that proclivity toward attaining your long-term goals (e.g., retirement), here are a few tips.

  1. Make your savings goals as tangible as possible. According to Lowry, “One of my favorite things to tell people is to nickname your savings accounts—for example, 'Japan trip, June 2019.' The more specific you can get, the more likely it'll throw out the psychological block for you.” When you’re attempting to save for retirement 40+ years down the road, it can be hard to get that tangible; so, consider instead setting incremental, specific goals—maybe it’s an international trip next year, a home down payment in five years, maximizing your employer-sponsored retirement account contribution in 10 years, etc. Once you’re able to see these milestones as being along a sort of continuum, it’ll become easier to visualize the ultimate retirement goal as something more concrete.
  2. Automate the long-term planning process as much as possible. As we discussed in this recent post, one way to ensure that millennial employees actually take advantage of their employer-sponsored retirement plans is to institute an auto-enrollment feature that eliminates the upfront administrative hurdles that can dissuade participation in the first place. (Again, if you’re a PERA member, rest easy—you’re already enrolled in and accruing your benefit from PERA’s defined benefit plan on Day 1 of employment.) Whether your employer automates their retirement plan enrollment process is kind of out of your control, but look for other ways you might be able to incorporate a “set it and leave it” approach to your savings. Nobel Prize-winning economist Richard Thaler has even said that simply removing the friction for making the right choice—such as automating a process—is enough to push us toward better long-term decisions (and he should know, right?).
  3. Reframe the way you look at your life trajectory. View your life as a continuum of opportunities rather than just “working life” and “retirement.” This kind of viewpoint offers a more accurate and holistic picture in which you might take a gap year or sabbatical, a partial retirement, and even a post-retirement career. Instead of thinking of it as planning for end-of-life retirement (how depressing), think of it instead as planning for a lifetime of flexibility that’ll allow for any range of personal or professional routes you might opt to take 10, 20, 40 years down the road.

Want more on this topic? Check out our "Retirement Planning" section for all of the goodies.