A Millennial’s Guide to Investing for Retirement – Even if You Have Debt

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In a Nutshell

Investing for retirement is best done while you're young. The important thing is to get started now, even if you start small, and build a foundation for future growth.
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You know it’s coming, but financially preparing for retirement is hard. After bills and loan payments, you may have just a small amount of money available for investing. However, according to many financial experts, investing for retirement is best done while you’re young.

Here are three tips on how to get started.

1. Invest as soon as you can.

If you’re like many millennials, you may be wrestling with the decision to pay off loans or invest in retirement. But how do you choose which one to focus on?

Personal finance expert Kali Hawlk says “It’s best to make progress toward multiple financial goals at one time if possible. That means allocating some money toward investing and some money toward debt repayment. If only $50 or $100 per month can go toward investments, that’s okay! Starting small is better than not starting at all.”

However, Hawlk warns that if you have high-interest debt of 8 percent or more, you should probably focus on paying that off first. “Knock (the high-interest debt) out as soon as possible, then focus the funds you were using for debt repayment on your investments.”

To do this, it can be helpful to create a budget. When developing a budget, think about including minimum payments on any loans so that you allocate the appropriate amount of money to avoid late fees and a possible decline in your credit score. Also, consider funneling some money into a savings account to cover unexpected expenses, such as a layoff, car repairs or medical bills. A general guide is to aim for is 3 to 6 months’ worth of expenses.

With the remainder of your income, you can decide whether to aggressively pay off loans, save for retirement or both.

2. Start small and grow.

You can start investing with just a bit of extra cash. To do so, consider contributing to a 401(k) plan (if offered by your employer) or choose an individual retirement account (IRA) with a low minimum deposit threshold; some mutual funds have thresholds of just $100.

You may be thinking that a $100 monthly investment doesn’t sound particularly lucrative. However, if you invest just $100 per month and receive an eight percent annual return over the next 30 years, you can accumulate around $150,000.

Erin Lowry, founder of personal finance website Broke Millennial, suggests employing these strategies to grow your contributions:

  • Each time you get a raise, increase the amount you put toward retirement by at least one percent of your income. So, for example, if you’re contributing 10 percent of your salary to your 401(k) account and you get a raise, increase your contribution to 11 percent.
  • Put at least 50 percent of any bonuses or unexpected income into a retirement account like an IRA or a 401(k).
  • If you have a side job, use the additional income to contribute to an IRA.

Think about earning extra money by taking on a part-time job as a retail sales associate or restaurant server, for example. Or, focus on a side gig or business such as pet sitting, freelance writing or selling handcrafted items on Etsy to generate funds for your future.

If you use these strategies to boost your monthly savings to $500 and continue to earn 8 percent investment returns, your nest egg may build to around $700,000 at the end of 30 years.

3. Look for other ways to devote money to retirement investing.

No matter your salary, bonuses or side income, staying vigilant is key to controlling expenses so you can stay on track with retirement investing.

Lowry recommends that millennials looking for extra cash “consider cutting one habit for a month (such as eating out for lunch or buying coffee) and contribute the money normally spent to your retirement fund. If you cut cable or negotiate on a cell phone plan, that extra money saved can get automatically routed to your IRA instead of your checking account.”

Andrew Schrage, co-owner of personal finance blog Money Crashers, recommends doing the following to save on entertainment:

  • Use deal-of-the-day websites like Groupon and LivingSocial for discounts on local restaurants and entertainment venues. They often offer deals that are 50 percent off – or more.
  • Invite friends and family over to your house instead of going to the movie theater or the bar.
  • If you’re going on vacation, use a travel aggregator (such as KAYAK) to research your airfare and get the best price. Also, don’t ignore local attractions – they can be a fantastic budget-friendly alternative to foreign trips.

Bottom Line

Ideally, if you’re under 50 and have a job that offers a 401(k) plan, federal law allows you to set aside up to $18,000 per year for retirement.

But even if your employer doesn’t offer a 401(k) or you’re self-employed, you can save for retirement using an IRA. For example, Hawlk puts money into a Roth IRA and SEP-IRA (Simplified Employee Pension IRA for the self-employed). The important thing is to get started now, even if you start small, and build a foundation for future growth.

Estimate your retirement savings

Use our retirement calculator to see how much money you could save by the time you retire, along with an annual breakdown of how much your estimated retirement savings could grow year over year.