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Retirement planning for millennials: How to get started and make progress

There are hurdles for millennials to save for retirement, but there are also steps that can help ensure retirement savings for people in their 30s and 40s becomes a habit.

Millennial man and woman walking in nature with child on man's shoulders.

Quick takeaways

  • If you’re a millennial thinking about retirement planning, you can get a start by envisioning the type of retirement you want—job status and where you might live, for example.
  • Foundational steps to retirement planning also include building a robust budget that accounts for expenses you have now and expenses you want to account for in the future.
  • There are several types of retirement accounts, including 401(k)s and IRAs, that can help you reach your financial goals. Each can add a retirement income stream to your post-work years.

As a millennial, when it comes to retirement savings, you’re a lot like every other generation. Some of you have saved a little, some of you have saved a lot, and some of you haven’t saved anything at all.

But as a millennial, you face challenges your parents and grandparents didn’t have in reaching some financial milestones. For example, millennials as a whole have lower wealth compared to other generations, and bigger wealth gaps within even their own generation. They also have lower rates of home ownership and greater debts as compared to assets.

Millennials, however, have one crucial thing going for them: time. If you’re in this age bracket, you have lots of potential earning—and saving—years ahead of you.

We know that saving is hard, period. If you haven’t quite figured out how to start, it can feel even harder. This list breaks down what can feel very complex into a series of easy-to-navigate steps. Do the first thing, then move on to the next. By the time you get to the end of the list, you’ll have figured out the retirement saving strategy that works for you—and be that much closer to your financial goals.

Do this first: Envision your retirement

It may feel strange to think about retirement when you have plenty of career in front of you, and we’re not suggesting you plan out your post-work, hour-by-hour routine. But it’s a fair question to ask yourself, even now when you’re in your 30s and 40s, what you think retirement might look like. For example:

  • Do you want to try out a new career or start a business later in life?
  • Do you want to move?
  • Would you prefer phasing in retirement—decreasing hours without leaving the workforce entirely? (That increasingly appeals to younger generations, including millennials, according to retirement research by Principal. )
  • Would you like to leave a legacy to family or an organization?

The answers to these and other questions might change over time, which is why once you envision your retirement, it’s important to re-visit those ideas periodically, too. That way you can start to plan for them in the next step: creating your budget.

Get serious about a robust budget

Just 23% of people think they need a budget. There are a lot of reasons people dodge tracking monthly spending. Maybe they feel bad about a purchase, or perhaps they don’t think they need one.

But a budget isn’t intended to make you feel regretful about spending. It’s intended to establish boundaries and help you set priorities by including space (and dollars) for big goals.

Think about it like this: You brush your teeth every morning—it’s a habit that prioritizes your health. You’ve probably done it so long that it second nature.

That’s the goal with a budget: You decide what you need and want to save and spend—your financial priorities. Your budget reflects what matters to you, and gives you the framework—the habits—to help reach those goals. Do it long enough, and your budgeting will become second nature.

Many budgets include just the basics, such as income and current expenses, and that’s a great starting point. But you’ll have a more robust, holistic view of your spending and saving if you include items that might be a few years off—a car, paying off debt, a home—and change your budget as your life changes—including daycare and college savings if you decide to have children, for example. This budget worksheet helps you put pen to paper for what those budget goals might be.

Once you have a budget, it’s time to check in on your retirement savings progress.

Start or boost savings through your employer with a 401(k) check in

Over two-thirds of everyone who works for private industry has access to an employer-provided retirement plan—most often a 401(k)—but only half chose to enroll. Why? There may be all sorts of reasons, from financial priorities to lack of awareness.

If you’re employed by a business that offers a 401(k) or other plan, you have a way to build a retirement foundation, no matter how much you save when you start. And once you start, you can increase contributions pretty easily, as your budget allows.

As you tackle this step in your retirement planning, use these three check ins.

  1. Are you enrolled? Some plans auto enroll employees; some do not. If yours is the latter, you have to elect to enroll. According to recent Principal research, 59% of people thought they were saving for retirement, but weren't. There are three ways to check: ask your HR department, look on your paystub for a retirement savings deduction, or check your online account access with your retirement provider. (For Principal, view principal.com/login and follow the directions to set up a new username and password.) If you’re not enrolled, consider the basic contribution—even 1% to start.
  2. Can you save a little more? If you are participating, consider boosting the percentage you save, even by a little, each year. You can do this whenever you like (if you get a raise, that’s a great time to do a contribution check in.) You’ll find lots of recommendations for how much you should be saving—some often set a goal of 15%. That’s a number to work up to; if you’re not there yet, it doesn’t mean it’s not worth it to start saving.
  3. Are you getting a match? You may see an employer match referred to as free money; it’s when your employer matches your retirement contributions, most commonly $1 for every $1 contributed by you, up to 6% of your salary. Try to contribute enough to get the full contribution.

Add some layers to your retirement savings

Many people think of retirement savings as money put aside in just one account, and that is certainly an option. But creating different types of retirement income streams, each with their own advantages, can build flexibility into your retirement budget. Common retirement savings types include:

Take IRAs as an example: About 42% of U.S. households have them. Unlike a 401(k), an individual retirement account (IRA) is set up and owned by you. And it’s portable: You take it with you, no matter your employment. So, if you have a job with no retirement plan, you can use an IRA to save for retirement. Or, you can rollover previous retirement savings accounts into an IRA. You can also add to your IRA with pre-tax dollars, often through payroll deductions.

Anyone with any income can contribute to an IRA; the only limit is how much you can contribute each year, a number set by the IRS. As you age, you can also take advantage of catch-up contributions (typically about $1,000) after age 50.

Tip: Two-thirds of older millennials want to start their own business, but one-third of small business owners don’t have their own retirement savings. If you decide to make the leap into owning your own business, an IRA can leap with you, allowing you to contribute what you can, when you can, while you’re getting a business off the ground.

Roth IRAs are another retirement savings vehicle to consider, with two stipulations: They have income limitations, and they are post-tax accounts. You add to a Roth with money you’ve already paid tax on, so when you withdraw it in retirement you don’t pay taxes as long as you meet certain requirements, including an account that’s been established at least five years.

If you’re already saving in a 401(k), how can you budget for saving in a separate account as well? One idea is to allocate any unexpected funds in a year—a bonus, a gift, a tax refund—for those accounts. Or, you could save enough to get the max employer match in your 401(k), then save a certain percent of your income in a traditional or Roth IRA.

As you begin to fine-tune your budget and grow your retirement savings, the next step is to safeguard the progress you’re making. To do that, it’s time to think about emergency savings.

Set up an emergency fund to protect your budget and retirement

If you had an unforeseen (and unbudgeted-for) expense, like a car breaking down, how would you pay for it? Some people might put the bill on a credit card. Still others might have to dip into retirement savings. In fact, the top reason millennials take a loan from a 401(k) is debt. The second reason is essential expenses, according to Principal research.

Building up an emergency savings fund, then, may offer two essential benefits: You’ll protect the budget you’ve made (because you won’t have to accommodate paying off an unexpected credit card bill) and you’ll cushion any depletion of funds from your retirement savings.

How much emergency savings should you have? As with all things, it depends—and building them up over time is a good strategy, too. Some recommendations say to aim for three to six months worth of expenses, but simply start with any amount you can in your budget.

A budget, retirement savings, an emergency fund: Those are the foundations you need to ensure your retirement planning and savings are a habit. Can you do more, if you’re able? Yes—and flexibility and pros can help.

Accelerate your progress by being flexible and finding professionals you trust

“Save as much as you can for as long as you can” is a classic retirement savings adage, but the most important word is can. Your budget can and will be fluid to respond to other priorities. What’s critical is to maintain your retirement savings habit, and increase what you’re saving when you’re able. And if you’re not sure about something related to your financial goals, there are professionals—a financial pro, a tax advisor, for example—who can help fill in the knowledge gaps.

What’s next?

Haven’t checked in on your Principal retirement savings in a while? Login to see if you’re on track for the retirement you’re envisioning.