If you were born anywhere from 1982 to 2001, or within a few years of this range, you are considered a “Millennial.” As a member of this group, you share many things —cultural references, familiarity with technology, attitudes toward work and family — with others your age. And if you’re one of the “later” Millennials, you and your peers have something else in common — specifically, you have a good opportunity to launch investment strategies to help you save for the future.
Why are you so well positioned to invest for the future? For one thing, it’s because you have so much of the future ahead of you. As an investor, time is your greatest ally, for a couple of reasons. First, the more years you have to invest, the greater the growth potential of your investments. And second, by investing for the long term, you can help reduce the impact of periods of short-term volatility on your portfolio.
Furthermore, since you may be in the early stage of your career, you probably have yet to reach your maximum earnings and may be eligible to put in the full annual amount to a Roth IRA, one of the most effective retirement savings vehicles available. (Eligibility to contribute to a Roth IRA is phased out over a specific income range.) When you invest in a Roth IRA, your earnings have the opportunity to grow tax free, provided you don’t start taking withdrawals until you’re at least 59½ and you’ve had your account for at least five years.
Even if you do contribute to a Roth IRA, you can still participate in your employer-sponsored retirement plan, such as a 401(k) if you work for a company, a 457(b) if you work for a state or local government, or a 403(b) if you work for a school or other tax-exempt organization. And you should indeed contribute to your employer’s plan, because it offers some key benefits: Your earnings accumulate on a tax-deferred basis, and you typically fund your plan with pre-tax dollars. So the more you put in, the lower your taxable income. (Taxes are due upon withdrawal, and withdrawals prior to age 59½ may be subject to a 10 percent IRS penalty.)
The amount you can afford to put into your 401(k) or other employer-sponsored plan depends on your earnings and other circumstances — but you should at least strive to contribute enough to earn your employer’s match, if one is offered. Otherwise, you’ll be walking away from “free” money.
All the money you contribute to your plan is yours, but if you leave your job before a specified vesting period — which often ranges from three to seven years — you may not be able to keep all your employer’s contributions. Check your plan’s rules to see how this applies to you.
Of course, since you, as a Millennial, are in the early stage of your working years, you may well be on the lookout for new job opportunities. But if you are close to being fully vested in your 401(k), you might consider waiting a few extra months — or even a year — to take a new job, so that you can leave with the money your employer has contributed.
As a Millennial, you’ve got time on your side as you invest for the future. So make sure you take advantage of all the opportunities that come your way.
This article was written by Edward Jones for use by Laura Evans, Edward Jones financial adviser of Richmond Hill.