Last Updated on January 23, 2020
Millennials don’t plan to rely on social security to help them during retirement, according to a recent Wells Fargo study. The study revealed that 60% of Baby Boomers currently in retirement rely on social security to cover the majority of their expenses. However, when interviewed, only 13% of Millennials said they plan to rely more on their personal savings than on social security. Generations X and Z share the same sentiment.
Millennials Won’t Rely on a Dwindling Social Security
The recent Wells Fargo study may not come as a surprise to many, given that Social Security benefits were only designed to replace 40% of worker’s income during retirement. Ultimately, this will create financial struggles for individuals to live the same life after they quit their 9-to-5.
Furthermore, Social Security has been facing its share of challenges and there have been many predictions that Social Security funds will run dry by the time Millennials are ready to retire.
This could be one reason Millennials are reluctant to rely on the social security system for retirement. However, with Roth retirement plans, Millennials and Gen Xers do not have to rely on social security, as retirement plans, like the Roth IRA, were specifically designed by the government so Americans can efficiently save for retirement.
Roth IRA or Roth 401(k) Retirement Plan
With the current state of the social security system and the younger generations’ lack of faith in it, it is more crucial than ever for Millennials to establish a Roth IRA or Roth 401(k) to build their retirement nest egg.
According to the Wells Fargo study, nearly half of Millennials surveyed do not even have $25,000 saved for retirement, although experts say a retirement nest egg should be no less than $1 million for a comfortable retirement.
A Roth IRA or Roth 401(k) is ideal for the younger generation, such as Millennials. It is funded with after-tax dollars, so although you will not receive an upfront tax break, every qualified distribution you make will be tax-free. But what exactly makes a distribution qualified? The account must be open for at least five years, or the individual must be age 59 1/2.
Best Retirement Plan for Millennials
Roth retirement plans are well suited for Millennials and the younger demographic because Millennials (and Gen Z) have so many years to enjoy tax-free wealth/withdrawals. A Traditional IRA, on the other hand, is more appropriate for individuals who are currently high earners, thus in a higher tax-bracket; when they move closer to retirement, they will likely be in a lower tax bracket, therefore, will spend significantly less on tax when they take a qualified distribution.
Other benefits of a Roth retirement plan include:
- No RMD – You are never forced to take money from your Roth plan, but required minimum distributions exist with traditional IRAs.
- No Age Limit – You can contribute to a Roth whenever you generate earned income, regardless of your age.
- Emergency Fund – You are allowed to make withdrawals any time penalty-free.
Self-Directing Your Roth Retirement Plan
Even though Millennials don’t rely on social security for retirement, they can rely on a self-directed retirement plan.
A self-directed retirement plan gives retirement savers the ability to make alternative investments they understand, such as real estate, tax liens, precious metals and much more. With the volatility of the equity markets and the fact that many Millennials don’t fully understand what occurs on Wall Street, it may come as no surprise that the majority of Millennials feel comfortable investing in alternative assets, like cryptocurrency, over traditional assets.
By self-directing your Roth retirement plan, you will gain better control over the investments you make as well as your retirement funds. You also benefit from diversifying the investments within your retirement portfolio -diversification is a great instrument in securing your funds, because you avoid “putting all of your eggs in one basket.” In other words, by investing in assets that have a lower correlation, such as real estate and the stock market, if your stock market investments perform poorly, you have your real estate investments to fall back on.
Start Today and Trust the Process
The most important step that Millennials can take is to start saving for retirement today. The Wells Fargo survey reveals that several Millennials are not financially prepared for retirement, but the study can change.
It only takes a few steps:
- Start today – if you haven’t established a retirement plan, don’t delay any longer. If you don’t have access to a work-sponsored 401(k), establish an IRA.
- Be consistent – make consistent annual contributions to your retirement plan. At the beginning, your contributions are more important than the income/gains of your investments.
- Make smart investments – with a self-directed Roth IRA, for example, you can make the investments you know and trust, so take advantage of that.
- Trust the process – understand that this is not an overnight get rich scheme, but in the end, the power of tax-deferral will reveal itself.