Every generation likes to think it’s nothing like the one that came before it. As for retirement, millennials might actually be right. Twenty- and 30-year-olds make up the first postwar generation with almost no shot at getting a traditional pension from a private company. Today fewer than 7% of Fortune 500 companies offer such plans to new hires, according to the consulting firm Towers Watson. In 1998, when members of Generation X entered the workforce, 50% of Fortune 500 companies offered such plans.
It’s not all long odds. Here are some things to remember as you prepare for your sunset years.
Relax, you’ve got time. According to the Center for Retirement Research at Boston College, if you can start setting aside money at age 25, you’ll need to save only about 10% of your annual income to retire at 65. Start at age 35 and your target is a manageable 15%. But wait until age 45 and you’ll be stuck socking away 27% of your annual income.
You can also spend money to improve your chances of a happy retirement. In your 20s it can make sense to forgo some saving to invest in your future earnings potential, says financial planner Michael Kitces of Pinnacle Advisory Group in Columbia, Md. Think education–not only degree programs but also short courses that teach marketable skills. You should also pay off high-interest credit-card debt and build a cash reserve. That can cover emergencies, Kitces says. It can also provide greater flexibility, like the ability to finance a move to another city for a better job.
Even so, if you have a 401(k) plan, try to save enough (typically 6%) to get your maximum employer match. That’s like free money, says Anthony Webb, an economist at the Center for Retirement Research. If you save 6% and your company matches 50¢ on the dollar, you’ll save 9% of your income, nearly what a millennial should be doing.
You have the best tools ever. One advantage today’s savers have over previous generations is that investing can now be simple and cheap. An index fund that holds a representative slice of the U.S. stock market–like the giant Vanguard 500 or newer cut-rate competitors like Schwab Total Stock Market Index–charges investors 0.17% of assets or less per year. Compare that with the 1% or so charged by typical fund managers, who tend to perform worse than index funds after fees. Index funds are now common in 401(k)s. Why stress about a measly 1% charge? William Sharpe, the Nobel Prize–winning economist, recently projected the returns of indexers vs. expensive funds over a lifetime and found that the low-cost funds could deliver over 20% more wealth in retirement.
You can handle some risk. At your age, a big market loss represents a tolerable drop in your true lifetime wealth, says investment adviser William Bernstein. Consider investing much of your 401(k) in a stock fund, which should earn a higher return than bonds or cash over time, though with greater risk.
But be ready for large swings. “A 30-year-old who sees a $19,000 portfolio cut in half is going to feel devastated,” Bernstein says. If you don’t know how much risk you can handle, consider a 60-40 split. Sixty percent can be divided between a U.S. stock-market index fund and, for diversification, a similar fund holding foreign stocks, such as Fidelity Spartan International or Vanguard Total International Stock. The rest can go into a bond fund, like Vanguard Total Bond Market. If your 401(k) doesn’t offer index funds in all three areas, look for options with low costs and a broad mix of assets.
After you set up a simple portfolio, try to leave it alone. You are unlikely to correctly time the twists and turns of the market. And at your age, you have better things to think about.