Despite the average retirement age continuing to increase, many millennials are optimistic about their chances of retiring by the time they reach their early 60s.
But just how feasible is that? It certainly won’t be easy, but their optimism isn’t misplaced if they put the proper retirement investment strategy in place while they’re still relatively young. (In 2019, millennials are between the ages of 23 and 38.)
Beginning to invest in retirement at an early age can come with very beneficial long-term results. It can allow for investing strategies that may not be suitable for those investors with a few more years under their belt.
Let’s look at three avenues for millennials to take in order to reach that dream destination of retiring in their early 60s:
1] Start saving early. Surveys show many millennials are behind in their savings for retirement. College debt is one reason often listed; another is rent and home prices that have increased faster than incomes. Still, delaying saving for retirement is the wrong mentality for millennials to have, especially when considering pensions are rare these days. They need to develop a plan of action early, because even a five-year delay in savings can cause a big impact on accumulated wealth down the road.
2] Diversify in planning. Millennials should employ several different savings vehicles in their retirement portfolio. This approach takes on added significance given the uncertainty surrounding stocks today. Millennials can make a big mistake if they rely almost exclusively on one type of savings account, but allocating money to different assets can reduce losses due to market volatility and help grow the nest egg.
Most recommend setting up an IRA, 401(k) — with an employer-matching — or a Roth IRA. All of these have preferential tax treatment, which means your money can grow without a tax burden. While my preference is most definitely a tax-free option, not everyone can set these up.
A fairly cheap way for millennials to diversify is to invest in low-cost index funds or exchange-traded funds (ETFs). Index funds and ETFs allow you to invest in different companies without having to pick which stock to buy.
3] Don’t be afraid to take some risks. Being young means being more free to take calculated financial risks than older generations. Older generations typically can’t afford as much risk because of shorter time horizons. With longer investment horizons, millennials can afford to handle some volatility in investing. Investing in an ample chunk of higher-risk stocks can yield some high returns and put millennials in a more favorable position to retire in their early 60s. And if the market plummets, you could still potentially have time to recover. The key is to know your own personal risk tolerance. If you don’t like to lose a lot, then higher risk investments might not be the right choice for you.
Starting the investment journey while young provides leverage and the ability to compound funds, bringing one closer to financial independence. The key is investing in growth stocks that can grow in value over five to 10-year periods. Building wealth happens over the long haul, and this approach is a prime example.
Millennials can certainly realize their early retirement dream. But it will require discipline, flexibility, and consistency, and it’s essential they start as early as possible.
Samuel J. Dixon, RFC, is a managing partner at Oxford Advisory Group. A graduate of the College of Business at Florida State University, he specializes in retirement planning, estate planning, and investments for retirees, executives, and small business owners. He lectures on risk aversion in retirement and developing a predictable retirement plan.