My name is Mel Samick and today we’re going to talk about millennial?s guide to tax-free retirement.
Today we’re going to look at how a millennial is in a different set of circumstances than any other generation before them.
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They are entering the workforce with the most debt of any generation entering the workforce, which is putting them way behind any other generation before.
On top of that, the housing market right now is at an all-time high, the highest it’s been since 2007.
When you combine those two things, it leads to a tough set of circumstances for the millennial generation.
The traditiona way is you go get an education, get a job, stay at that job for 30 to 35 years, invest in that pension retirement plan, retiring at 65 and then living happily ever after.
And that’s just not the narrative that is around these days, especially, for this generation.
So the new narrative is we need to look at all these different sets of circumstances and come up with a different way that’s better for you.
How can we do that? What are some things that we can do?
The new way
Let’s take a step back and look at the situation you are currently in.
When you look at where millennials currently are in retirement, the average millennial has saved about $67,000 in their retirement account.
If you take a closer look at that, that number is not even that high.
If you look at the median number, it’s closer to $19,000 per person. Two thirds, about 66%, don’t even have anything saved for retirement, which is a huge number.
33% that do have retirement accounts, represents the entire millennials in the workforce today. For the other 67% not in the work force this is not very encouraging for there generation.
The reason for that is, you’re coming out of college, you have student loan debt to pay off. Homes are largely unaffordable right now due to the run up in values over the last 10 years. Previous generations before have built their wealth by having home equity. So you been forced to rent, delaying this benefit for yourself.
So you have to pay down your debt first. Plus all the cost associated with raising a family. Before you can begin the process of building your wealth.
?And then on top of that, most of the advice today advises you to invest in your company’s 401(K), especially, after the match.
There are a couple issues with this.?When you look at where Millennials are at today, they are changing jobs every one to two years.
Long gone are the days where you’re going to stay with a company for 30 to 35 years.
What most are doing is working for a company for a year, building up your LinkedIn profile, your resume, then you’re looking at outside sources and competition to get a higher salary, to get a pay bump.
If you’re investing in your company’s 401(k) that has a match, the vesting period is probably longer than one or two years.
On top of that, you have to take that 401(k) and move it to your new company?s 401(k) or else it’s going to stay there and you don’t know what’s happening with it, where it’s at, is it growing, is it not, are you losing money?
I had a friend in a similar situation where he just withdrew that money altogether because he said it was easier to just take the penalty and pay the taxes.? I would not recommend that. I prefer moving it over to a new company or into an IRA where you have more control of the money as well as more access. But I do understand his frustration.
So then where do you start?
I kind of look at it as going into the gym.
Think about it, new years is right around the corner and everyone’s going to make their new year’s resolution to get in shape, and start working out.
If you’re one of those people, and you’re doing that, and I’m sure you’ve done this before, you go to the gym the first day and it’s hard, you don’t know exactly what you’re doing, you don’t have a set plan, you’re going there, you’re working out, maybe putting up some dumbbells, just trying to get a burn.
And then, finally you get home, you’re tired from working out, you’re sore.
The next day you’re even more sore. Then you have to wake up again and do it again and again, it’s hard. That is similar to starting a financial plan for retirement.
It’s not easy, but the longer you do it the easier it becomes.?Same if you’re saving for retirement.?
If you are starting to save for retirement, it gets a little bit easier and easier. The further you go along and the more you do it, you don’t even notice that money coming out of your account anymore.
If you look at what retirement experts are saying, “You need to save at least 15% of your income.”
Well, that’s not that easy to do right away. But if you take it step by step, it’s a little bit easier.
So, what are some things we can put our money into? The 401(k) is an option. But if we’re changing jobs every so often, if we aren’t getting that match because it’s not going to be vested by the time we move and change jobs or change companies, what do we do?
Tax-free options
Let’s take a look at some tax-free options.
The reason I want to look at tax-free options at this point in your life is because you are probably in the lowest tax bracket you will ever be in.
Hopefully, you will be making more money in the future when you’re 40 and 50 than you are right now in your 20s and 30s, right?
If you’re doing that, why would you want to take and defer taxes to when you’re in a higher tax bracket later on in life?
It doesn’t make a lot of sense.
And on top of that, if you look at the general U.S. tax rates throughout history, we’re in one of the lowest tax rates we’ve ever been in at this time of your life.
Why not pay the taxes now, let that money grow tax-free and then take it out tax-free?
Option #1: Roth IRA
So here are a couple of solutions, you have a Roth IRA and this is really where I would start.
Again, if we’re taking those baby steps, you are waking up that first day, January 2nd, going to the gym and getting that first workout, and this is what I would relate to that, is that Roth IRA.
The reason for that is because, again, you have tax-free growth.
The money you put in this account, it’s going to grow tax-free and then you have access to the principal.
Anything that you have put in this account, you can take out without any penalties, without any fees, without any taxes, as well.
You can’t touch earnings in the account, but all of the principal, you can definitely take out if you need it.
And then, finally, you get tax-free distribution after age 59.5.
Once you hit that retirement age, you can take that money out tax-free and not have to worry.
Now, what are some of the cons? Why wouldn’t we put all our money into this?
Well, one, you can’t. There’s a limit to how much you can put into this account.
The limit is $5500 if you’re under the age of 50.
So, with this limit, it is just a great starting point, once you’re making more money and you’re in that second, third step to building a retirement nest egg, you’re going to want to look elsewhere.
And then, finally, you also have market risk in the Roth IRA because it’s going to be tied to the market, it’s going to go up and down with the ebbs and flows of the market.
But that’s not, necessarily, a bad thing because you have so much time before you do have retirement to let that grow.
And if you do lose some money, you have the time and the potential for it to grow back.
So again, if you hit these contribution limits in a Roth, then what do you do?
Option #2: Indexed Universal Life
Well, there’s a vehicle called indexed universal life (IUL).
It’s a life insurance vehicle, but it’s a tax-free vehicle and a life insurance chassis.
What we’re doing is we’re taking advantage of some of tax codes that are written in law that allow us to grow our money tax-free and tax-deferred inside of a life insurance vehicle without some of the limits that you have in a Roth IRA.
You can put as much money as you want into an IUL if it’s structured correctly.
The benefits you get from it are tax-free growth and tax-free distribution.
And then a little added caveat, you get some market protection because you’re not exactly in the market.
You’re just tied to market performance, which can be very crucial. Especially, when you’re building that nest egg.
You have a zero floor so you’re not going to be negative in your interest accounts. You get upside growth based on market performance, subject to either a cap or participation of the markets earnings.
Some of the downsides that you have in an IUL is that you don’t have some of the early liquidity that you get in a Roth.
That’s not necessarily a bad thing either because, again, these are for retirement, these are growing, you want them to grow and take this out when you’re 60, 65 or 70 to supplement your retirement income on a tax free basis.
And then, finally, another downside risk is there is a cost of insurance.
But, again, because of your generation, your age, that cost is minimal because you are young, you have a longer life expectancy.
Millennials are going to live longer than any generation before us, so you need multiple methods to save for retirement.
And so these are two benefits that you can take advantage of to create a tax free retirement.
These should be the two first steps: building that Roth IRA, and begin putting money inside an IUL for that final piece of retirement to help you grow your tax free retirement.
To learn more about a plan to create a tax free retirement please call me at 888-839-3536 or e-mail me at MelSamick@msn.com.
Mel