Millennials Walk To The Beat Of Their Own Drum, But Retirement's Death Knell Drones On

Tax time is right around the corner, and with the inevitable shifting through tax documents, broad conversations toward financing arise. In looking at pay stubs and earnings, many are reminded for the first time since last year of automatic retirement deductions (for those with Roth and traditional IRA accounts) and taxes taken out for Social Security. Once a year, the reality of retirement funding comes face to face with millions of Americans preparing their tax documents.

For a select group of Americans, the Millennials, retirement is still decades away, but the conventional wisdom remains that saving for retirement should have begun yesterday at the latest.

Benzinga took the opportunity to speak with Bill Engel, senior vice president at Fort Pitt Capital Group regarding the Millennial investor and planning for a financially secure future.

Benzinga: What Makes The Millennial Generation Unique?

Bill Engel: There are several things that are unique about the Millennial generation, and which have impacted their view of money. First, most of them have witnessed two fairly severe stock market crashes in their lifetime. While they may not have been directly affected, the dot-com crash and, more dramatically, the Great Recession had an emotional impact on how they view money and Wall Street.

Many have an inherent distrust of finances and Wall Street, and see little value in committing their capital to buying stocks, bonds and mutual funds. As a result, many have delayed investing and contributing to retirement, and instead amass cash.

Another factor shaping Millennials is the job market that they began to enter – in some ways very different from the ones their parents entered, and more difficult to crack into. Because a lot of Baby Boomers didn’t do a good enough job saving for their own retirement, they are working longer, preventing new job openings for the Millennial generation.

Lastly, Millennials stereotypically have a more difficult time becoming financially independent, and a high percentage still rely on their parents for at least some help much longer than previous generations did. This lack of independence has, in some cases, stunted their financial maturity and potential for growth.

Source: TAL Group, Inc.

What Should Millennials Keep In Mind Regarding Retirement Benefits?

Bill Engel: In some ways, employer-sponsored retirement benefits can be much more valuable to younger employees – Millennials – than even for older employees, simply because of the time value of money.

The longer a person has to invest, the greater chance of compounding. An employer-sponsored plan like a 401(k) also makes it easy to save through automated payroll deduction.

Finally, if the employee opts for the tax-deferred deduction, it lowers his/her taxable income. All of these benefits can be tremendous down the road closer to retirement, but it can be difficult to appreciate those benefits in your twenties/early thirties.

What Are The Pros/Cons Of A Roth IRA Or 401(k)/Traditional IRA?

Bill Engel: When trying to decide between a traditional or a Roth IRA, several things need to be understood and considered.

First: In both cases, the person needs to be committed to making these contributions for the long-term. With a few rare and technical exceptions, this is money that you cannot touch again until you are 59 ½ and should be treated that way.

The biggest difference between the two options is when they are taxed – for a Roth, the contributions come from after-tax dollars, but the contributions are never taxed again. With a traditional IRA, you defer paying the taxes until withdrawal, but you’ll end up paying taxes on both principal and growth.

Keeping in mind that Uncle Sam will always get paid either way, the decision between the two really comes down to current versus anticipated tax rates. Roth IRAS tend to favor younger workers because they are typically in lower tax brackets, and have the longer time horizon to take advantage of the tax-free growth. Conversely, someone who is a high earner in a high tax bracket will probably benefit from tax-deferral, with the assumption that they will be in a lower tax bracket at retirement.

Another factor that people should consider is that with a traditional IRA, at 70 ½ the IRS forces you to begin withdrawals (called Required Minimum Distributions), which are then taxed as income. Because the Roth contributions were already taxed, any withdrawals are tax-free after 59 ½, but you never have to make a withdrawal. As a result, Roth IRAs are typically the last source of income tapped by retirees, and have the longest time horizon.

What is most important is that younger workers (Millennials) begin saving for retirement as early as possible, and they can consult with a financial advisor to determine which vehicle would be most suitable for their situation.

The Bottom Line

It’s never too early or too late to start looking toward retirement savings. The earlier you start, the more opportunities available at your disposal, however. Take advantage of the time you have, talk with a financial expert and plan your unique timeline to make your retirement dreams sustainable.