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Millennials are determined to retire early. Here's how they can actually pull it off.

Early retirement is a matter of math. Here's how to make sure the numbers add up in your favor.
Image: Smiling young woman drinking coffee and talking on cell phone at laptop in cafe
Developing other income streams — like a blog that can generate advertising revenue — is important for retirement planning, so that you're not solely dependent on the stock market. Getty Images/Hero Images

For generations, early retirement has been a dream among Americans, but for millennials, it’s less of a lighthearted fantasy than it is a set goal. According to a recent T.Rowe Price survey, 43 percent of millennials expect to retire before the age of 65, while a Bankrate survey found that millennials cited age 61 as the ideal age to bid adieu to their careers.

43 percent of millennials expect to retire before the age of 65.

Retiring a few years before your retirement benefits kick off doesn’t sound like that big of a deal, until you consider the odds American millennials have stacked against them. A study by NerdWallet found that because of factors such as rising rents and student loan debt, the graduating college class of 2015 won’t be able to retire until the age of 75 — two years later than those who graduated in 2013.

Despite these and other dismal findings (like FinanceBuzz’s survey showing just what people are willing to sacrifice for an early retirement — everything from books to coffee to their own pets), retiring early isn’t an unattainable goal, and you can take concrete steps to make it happen.

“To retire early is a matter of math and making it work to your advantage,” says Riley Adams, CPA, who runs the personal finance blog Young and The Invested. “In the past, many espoused the notion of saving 10 percent of your paycheck and retirement would take care of itself. This future state relies on the presence of entitlements being available in their current form, which is not a certainty for millennials like it is for baby boomers or Gen Xers. As such, to retire early, millennials [must] take retirement planning more into their own hands and elevate their preparation.”

Get strategic about paying down student debt

Facing down student loan debt can be daunting, but it’s imperative to pay it off strategically.

“The best thing that graduates can do is to be strategic about making regular payments against their loans, paying off higher-interest debt first (and being wary of refinancing that offers a variable rate, which may increase in the future),” says Rick Wholey, CFP, managing director at Baird. “Also, remember that in some cases, student loan interest is tax deductible.”

Don’t skimp on your 401(k) contributions

So how do you elevate your preparation? For starters, you need to be dumping as much money as you can into your 401(k) plan.

Jason Alderson, CFP, wealth manager at Elbert Capital Management, suggests that too often, millennials are “leaving money on the table” by neglecting to take full advantage of their company’s 401(k) plan.

“I often find that many millennials are goal driven but in a sequential manner,” says Alderson. “Many skip making 401(k) contributions that are eligible for matching because another goal has been prioritized above 401(k) contributions and has not yet been completed. Over time, that adds up to a large amount of money that could have been used to make up a potential deficit.”

You can work out how much you should be putting into your 401(k) by using calculators like this one from NerdWallet, but generally, financial planners recommend putting in at least 10 percent.

Invest in a diversified portfolio of small stocks

“Invest in a diversified portfolio of small stocks,” says Dr. Robert R. Johnson, CFA, CAIA, chairman and CEO of Economic Index Associates and professor of finance, Heider College of Business, Creighton University. “The easiest way to do this is to invest in an ETF (exchange-traded fund) with the Russell 2000 [(a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index)] as a benchmark. Since 1926, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10 percent. Investing in a diversified basket of small stocks provides even greater returns. The compound annual rate of return of a basket of small stocks over that 93-year period according to Ibbotson Associates was 11.8 percent, [which] may not sound like much, but over the long term a small return advantage can have a huge ending wealth difference.”

Small stock indices (or performance) tend to be more volatile than large stock indices, Johnson notes, “but millennials have the distinct advantage of having a long-term time horizon and being able to ride out that volatility and take advantage of compounding.”

Get a Roth IRA

Regardless of whether you have a 401(k), millennials should also opt into a Roth IRA, which allows them to set aside $5500 of their annual income.

“Roth IRAs are very popular accounts with millennials, and the appeal makes sense: Pay taxes now on contributions and don’t pay taxes on any of the growth taken through qualified withdrawals during retirement,” says Derek Brainard, AFC, CRPC, director of financial education at the AccessLex Center for Education and Financial Capability. “What many millennials don’t realize is that Roth IRAs have a back-up feature that distinguishes them from other types of retirement accounts. You can withdraw your contributions from your Roth IRA at any time (even before age 59 ½) without penalty, as long as the value of your investments still equals at least what you put in. This can be useful for investors who need to access their funds before 59 ½, but remember, whatever principal you take out is no longer ‘working for you’ in the market.”

If it’s not a bill, pay it with cash

NBC News BETTER has previously explored how using a cash-only system can help people save money. Lauren Mochizuki, 34, a nurse and creator of the budgeting blog Casamochi, swears by this method, noting that by doing away with credit cards, she and her husband have been able to tackle $266k in combined debt.

“Apart from a home and student loans, everything else you purchase should be paid with cash,” Mochizuki says. “If you don't have the money to buy something, wait until you do, otherwise you will spend your life in a cycle of paying off your debt, and this will detract from your efforts to save for your retirement.”

Hire a certified financial planner; it can be a one time thing

Paying someone to help you save money can seem somewhat self-defeating, but a certified financial planner can walk you through the ins and outs of retirement planning and customize a system that works for you.

“A financial planner can help identify your goals and work with you to create a roadmap to achieving said goals,” says Alderson. “They can help you determine if your budget is in line and make sure that your investments are aligned with your actual risk tolerance. Many think that financial planners and advisors are for the wealthy but changes in the industry have significantly brought down servicing costs allowing for planners to come up with new ways to charge for their services. ‘It's too expensive’ is a comment that I hear frequently but with a goal of retiring early, millennials [often] can't afford not to hire someone to help keep them on track.”

The costs of a financial planner’s services can vary widely, and how much you're charged depends in part on your portfolio, as well as what sort of arrangement you set up. Alderson finds that people who “like to DIY or manage their own investments” can benefit from a “Fee for Planning” arrangement, where the financial planner “typically charges a flat fee for a completed plan based on the complexity of the plan (anywhere from $1,000 to $10,000) or charges an hourly rate to complete the financial plan (typically between $250 to $350 per hour).” In this scenario, “a plan is usually completed one time and then may be updated at certain intervals for an additional fee,” says Alderson.

If buying a house, consider a multi-family home you can rent out

If you’re saving to buy a house, you might want to save a bit longer to buy a multi-family home. Renting out spare space can reap big savings benefits.

“If you can purchase a multi-family as your permanent residence, your cost of living will be drastically cut by the nature of your tenants paying most of your mortgage,” says Stephen McGrath, a practice management assistant at Cross Coastal Advisors. “This puts you in a position to either sell the property later to buy another home, or better yet, buy a different property and keep the multifamily as an income stream that will forever support you as long as you maintain the property and have tenants in it.”

Sandy Yong, author of “The Money Master: Inside Secrets On How to Make Your Money Grow and Stay Safe” also recommends becoming a landlord. If that’s not possible, or if you’re unsure as to whether you want the job of being a landlord, “consider listing a spare bedroom on Airbnb for travelers visiting your area This way, you can get a taste of what it will be like to be a host — and earn additional income,” Yong says.

Turn a side hustle into a nest egg

Turn your side hustle into your retirement machine,” says Niko Finnigan, CFA, CAIA, a partner at Delta Wealth Advisor. “Before spending extra cash from a side hustle on yourself, use the funds to create your own retirement plan. If you own your own side hustle company, you can fund a SIMPLE IRA [(a Savings Incentive Match Plan for Employees Individual Retirement Account)], with up to $13,000 in 2019. Best of all, you can do this contribution in addition to your 401(k) contributions through your daytime job.”

Fully funding both a 401(k) and SIMPLE IRA can result in a nearly 70 percent increase in annual retirement savings rate, Finnigan adds.

Start your own blog or YouTube channel — it could bring in bonus revenue

“Developing other income streams are vitally important. Not being solely dependent on the stock market is key to success,” says McGrath. “This also could entail seeking equity is smaller start-up companies by contributing your time and skill set as an advisor (if possible). Again, small income stream for a short time investment. Start your own blog or YouTube channel, contribute regularly to it (on a topic you love) and you should see slow growth to the point where you can generate revenue from advertising. The more options you can create for yourself the better you will be in the long run.”

Don’t overlook Social Security

Research from TransAmerica Center for Retirement Studies, found that 80 percent of millennials are worried that social security won’t be there by the time they retire. It’s a valid concern, but financial planners don’t think you should entirely rule SS benefits out.

“While there will likely be changes to the system before you retire, you need to consider it in your plan,” says Dr. Brandon Renfro, CFP, a financial advisor and assistant professor of finance at East Texas Baptist University. “Something you can do now is make sure that you are on track to be covered for 35 years. Since your benefit is currently calculated based on your highest 35 years of earnings, anything less than 35 years of covered employment will mean you have zeros in that benefit calculation.”

Create a login on the official SSA site to learn more.

Rethink retirement. Perhaps you can still work part time doing something you enjoy

“Retirement doesn't need to include a complete end to working,” says Adams. “Millennials can develop unique skills to earn money on-demand through side hustles, contracting, or being a part-time small business owner. These sources of income will complement passive income streams. The key here is for the work to be enjoyable.”


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