Doc's note: Today, I'm rounding out my series of the three things you need to do to live a healthier, wealthier lifestyle in 2019 with the one thing I see millennials doing better than other generations. No matter how old you are, it's something you need to start doing today...
I hate to say it... but "millennials" are getting something right.
I'm talking about retirement savings. The so-called millennial generation – folks born between 1982 and 2004 – is saving more than past generations.
A study from the insurance and investment firm Transamerica showed that 67% of 22-year-olds are saving for retirement already. And they're starting sooner... Today's average 30-year-old started saving at 25, but the average 60-year-old didn't start until 35.
But while they're saving earlier, millennials still aren't saving enough... Worse, they hesitate to invest in the stock market or even in retirement accounts like 401(k)s or IRAs. That means their money is just sitting in savings accounts earning nearly nothing.
We need to make sure our kids and grandkids prepare for the future. With Social Security's insolvency on the horizon, we need to make sure they start planning today.
The first lesson we should teach is the power of compounding. As I've written before, using time to boost your returns is the best way to build wealth.
But there are some other lessons we should teach millennials. My team and I put together a few key ideas for kids today who are just coming out of high school or college... getting their first jobs... and starting to take a hard look at their finances. These are the things I wish I had heard at 20 or 25. Most of them still resonate with seasoned investors...
1. Take your employer's money.
If there's one financial decision that every single person needs to make, it's this... Always contribute to your 401(k) if your employer matches it.
Never underestimate the power of a 401(k) account. A 401(k) is a retirement account that your employer sponsors and manages.
Our employer matches half of an employee's contributions up to 6% of his salary. That means if the employee sets aside 6%, the employer adds 3%... for a total of 9%. That's an instant 50% return on your money...
Skipping out on that free money is the worst mistake in personal finance.
- It's never too early to start an IRA.
Another type of retirement account – and one that doesn't require an employer to set up – is an IRA. The real benefit to an IRA is the tax savings.
When you put money in a traditional IRA, you get a tax deduction for the initial deposit, and the government defers taxes on the money until you withdraw it, typically sometime between ages 59 and a half and 70 and a half.
Deferring taxes saves more than you think. If we take two couples, each with $11,000, and have one invest in an IRA while the other invests in a trading account and pays taxes, we can see the power of not paying taxes. After 30 years, the tax-deferred account will be worth $1,109,592. The taxed account will be worth $880,180. That's nearly $230,000 extra just by avoiding taxes.
Putting money into an IRA is also a way to earn a big tax credit.
The Saver's Credit matches a portion of what you put into your IRA up to $2,000 (or $4,000 if married). The credit amount is based on your household earnings. For example, in 2019, a married couple earning between $41,501 and $64,000 earns a tax credit equal to 10% of their IRA contribution.
The tax credit gets bigger for lower income levels. If a married couple makes less than $38,500, the credit is 50% of their contribution.
You can also choose to set up what's called a Roth IRA. This works like a traditional IRA, but you pay taxes on the money before you deposit it. Then the IRS won't tax future withdrawals. To read more about the types of IRAs and how to choose between them, read our issue right here.
- Make money off your health savings.
Health care plans in the U.S. are pricey. Many of us can't or won't pay for 100% coverage with no deductibles.
That's why there are plans called "high-deductible health plans," or HDHPs. These work by offering a low baseline coverage – so you're not shelling out for every possible test and procedure you probably won't need. But they come with high deductibles, plus out-of-pocket expenses... The deductible minimum for individuals this year is $1,300.
To increase the benefit, set up a Health Savings Account (HSA) with your HDHP. An HSA works by allowing you to bank pre-tax dollars. You can then use that money to pay for health expenses. Best of all, there are no use-it-or-lose-it rules.
I recommend making the maximum contribution ($3,450 for individuals and $6,900 for a couple). If you can't afford that, try taking your deductible amount and dividing it by the number of paychecks you earn each year. That way, after one year, you know you'll be able to cover the full deductible if any emergencies crop up.
And here's the big loophole... The IRS allows you to use your HSA like a garden-variety IRA. You can just keep putting money in it until age 65. Once you hit 65, you can withdraw the money without penalty for any expense... you'll just have to pay taxes if it's non-medical.
It's never too early to start taking advantage of retirement accounts. If you have children or grandchildren ready to start preparing for their future, I encourage you to share this issue with them.
What We're Reading...
- Pew Research looks at the growing trend of millennials living at home.
- In case you missed it: Our classic essay on the power of compounding.
- Something different: Philly's unusually preserved 18th century artifacts.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
January 4, 2019