We often hear from millennials who know they're supposed to start planning for their financial futures and saving for retirement, but just aren't sure how to go about it.
This is understandable; after all, when you're focusing on graduating from college, paying down student loans and landing that first job, saving for a retirement that's 40 years or more in the future may just be the last thing on one's mind. Plus, given the (slowly) recovering state of the economy, many relatively new college grads may not be in jobs that pay well enough to make it easy to put a hefty percentage of each paycheck into a retirement savings account each month.
But given the dwindling availability of pensions and other traditional social support systems -- a 2014 report from the Social Security Administration forecasts that the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust fund reserves will be depleted by 2033 -- millennials must take it upon themselves to start saving for their futures now, using investment avenues such as 401(k) plans and Individual Retirement Accounts (IRAs).
Here's where retirement planning advisors suggest that they start.
Strategic Financial Planning: Do Millennials Know Where to Start?
For many members of Generation Y, a lack of basic investment knowledge keeps them from engaging in the financial planning process. Studies indicate that, as a group, American teenagers lack financial knowledge and skills; this may lead to a lack of confidence that prevents them from taking charge of their financial futures.
Further contributing to the issue, millennials have the greatest student loan debt burden of any previous generation, as well as little hope for social financial support; a 2014 study from the Pew Research Center found that more than 80 percent believe that they'll receive reduced or no benefits from Social Security when it comes time to retire.
Then there's the economy. While this generation may be most educated thus far -- hence the student loan debt -- they're also more likely to be un- or underemployed. All of these factors point to the pressing need for millennials to take control of their finances and invest for the future -- starting today.
Investment Guidance: Harness the Power of Compound Interest
Fortunately, this generation has one important factor on their side: Time. With a long time horizon, millennials can start small and let the power of compounding interest work in their favor to grow their nest eggs. Having several decades to invest means that there's time for portfolios to recover from market corrections or more severe moments like those in 2008.
It also means the millennials can start small -- like really small -- and still have time to grow their investments. By following financial strategies that include regularly contributing to a 401(k) and an IRA, then letting those funds grow through compounding interest, millennials can continue to increase their contributions over time as they receive promotions and raises.
And when we say the power of compounding interest, we're not kidding. For instance, using the , we see that starting with an initial investment of $500, contributing just $200 per month for 40 years at an interest rate of 7 percent leads to a future value of just under $500,000.
It's most important for millennials to simply start investing now, and keep on contributing through time. Even starting small can pay off in the end -- after decades of wealth planning.