When it comes to retirement, many Americans remain financially unprepared. However, there is one group that could win the retirement saving game. A distinct group of Millennial super savers are making serious financial sacrifices to pad their retirement accounts. The question is, is it worth it?
- Younger generations, especially Generation Z and millennials, are saving more for retirement than other age groups.
- Individuals can still save for retirement if they don’t have a 401(k).
- Individual Retirement Accounts (IRAs) are the key alternative, although annual contribution limits are lower than 401(k) plans.
How some Millennials save money
A recent survey by Principal Financial Group took a close look at the financial habits of millennial savers who are saving 90% or more of the annual contribution limit in their 401(k) plans or investing at least 15% of their income towards retirement . A common thread among these super savers is that retirement is their top financial priority.
In terms of how much they’re saving, as of 2021, 33% of these super savers are stashing $17,550 or more in their 401(k) plans and 31% are investing more than 15% of their income in retirement savings .
To make these contributions, super savers are making compromises in other areas. According to Principal Financial Group, during the COVID-19 pandemic, 44% of super savers were driving older cars so they could funnel more money into their retirement accounts. 38% said they weren’t traveling as much as they would like to, and 36% were doing DIY projects in their homes instead of hiring professionals.
How much are these sacrifices worth?
Determining whether it makes sense to put off buying a home, skip vacations, or drive an older car is ultimately a numbers game. Suppose a 30-year-old female saver contributes $16,200 to her 401(k) annually, with her employer 100% matching the top 6% saved. If that employee earns a 6% annual rate of return, she could retire at age 65 with more than $2.4 million in savings. If you contribute $18,500, that figure will grow to over $2.6 million.
Using the median household income of $79,900 and a contribution rate of 6.8%, the same 30-year-old would instead end up with about $1.1 million in savings, assuming an annual return of 6%. That’s still a decent amount of money, but it’s a far cry from what super savers are meant to hoard.
In 2022 and 2023, investors can contribute even more as the Internal Revenue Service (IRS) has increased the contribution limits for 401(k)s. For 2022, the maximum contribution limit for a 401(k) — as an employee — is $20,500, and $22,500 for 2023.
How can you be a super saver if you’re unable to fully maximize your plan or don’t have access to a 401(k) at work?
If you have a 401(k), you can start by reevaluating your current contribution amount. At the very least, you should contribute enough for the company to match. If not, increasing referrals should be a priority, so you don’t lose free money.
From there, evaluate your budget to see if you can reduce or eliminate some of your spending. When you can cut things out of your budget, you reduce the amount of money you need to live. That’s money you could use to boost your 401(k) contributions. Diverting your annual raise to your 401(k) is another option if you’ve already trimmed your budget as much as possible.
If your plan has an automatic escalation feature, this is another way to increase your savings relatively painlessly. An analysis by Fidelity Investments saw 401(k) balances hit an all-time high of $112,300. Among the 33% of workers who increased their savings rate in the previous 12 months, 60% did so using auto-escalation.
Saving into an individual retirement account (IRA) is another option if you don’t have a 401(k). The annual contribution limit for IRAs is lower than 401(k), at $6,000 for 2022 and $6,500 for 2023. However, the money can still add up over time if you’re saving the maximum amount.
Remember, a traditional IRA offers a deduction on contributions, while a Roth IRA allows you to make tax-free withdrawals after you retire. If you expect to earn more later in life, tax-free withdrawals could yield greater tax benefits than a deduction on contributions.
The bottom line
Being a super saver may not be realistic for everyone. It’s possible, however, to build a solid retirement strategy even when you’re not maximizing an employer’s retirement plan. Saving as much as your budget will allow, starting early, and putting money away consistently are all important steps in reaching your retirement goals.