January 12, 2024

When should Millennials and Gen Z start planning for retirement?

When should Millennials and Gen Z start planning for retirement?

We understand that when you're in your twenties or early thirties, retirement can seem a world away. However, no matter where you are in the world, be it the United States, the United Kingdom, or Malaysia, starting your retirement planning early is crucial.

Interestingly, a recent Goldman Sachs’ Retirement Survey & Insights Report revealed that 34% of Millennial respondents feel they're lagging in their retirement savings. This statistic, based on responses from 1,566 individuals surveyed between July and August 2022, underscores the need for proactive retirement planning.

Understanding the power of time and flexibility in retirement savings.

Let's imagine two individuals, Bob from the U.K. and Ali from Malaysia. Both are 22 years old and earn a respectable income in their respective countries.

In the U.K., a system called automatic enrolment for workplace pensions is in place. As of April 2019, the total minimum contribution is 8% of qualifying earnings, of which at least 3% must come from the employer, and the remaining 5% from the employee (which includes tax relief from the government). Bob, choosing to live in the present, decides to contribute only the minimum, preferring to have more cash on hand to support his current lifestyle.

In Malaysia, the Employees Provident Fund (EPF) is a mandatory savings scheme for employees. As of 2021, employees below the age of 60 are required to contribute 11% of their monthly wages to the EPF, while their employer contributes an additional 12% or 13% (depending on the employee's salary level). Ali, residing in Malaysia, is already contributing to his EPF as mandated by the government.

However, Ali, unlike Bob, decides to take an extra step. After discussing with his employer the potential benefits of additional contributions, he voluntarily contributes an extra 5% of his salary to his EPF account, over and above the mandatory contribution set by the Malaysian government.

It's essential to engage in discussions with your employer and conduct personal research to understand how you can optimise your retirement fund.

Assuming a consistent rate of return on their investments, by the time they reach 65, both Bob and Ali will have amassed a significant retirement fund. However, Ali's retirement fund will be larger, thanks to his additional voluntary contributions. This demonstrates the power of time and compounding interest - the earlier you start, and the more you contribute, the more you can accumulate.

Overcoming challenges faced by young investors.

We recognise that despite the clear advantages of early retirement planning, many young people delay starting their retirement savings. Common obstacles include high student loan debt, the high cost of living, and relatively low starting salaries. These challenges are faced by young people globally, from the U.S. to the U.K. to Malaysia.

Neglecting retirement planning in your youth inevitably creates more problems for the future. We recommend starting by understanding your monthly budget and determining how much you can contribute to your savings or investments through that.

If you're a higher earner seeking to understand your savings and investment options for retirement, our retirement experts at Melbourne Capital Group are here to help. Similarly, we can guide you through other challenges, including the uncertainty that high inflation brings.

Strategies for funding your retirement as a millennial or young adult.

You might be contemplating how to start funding your retirement, especially with other financial responsibilities such as student loans or saving for a house. Here are some strategies to consider:

  • Start saving early: The earlier you start saving, the more time your money has to grow. Even small contributions can add up over time, thanks to the power of compounding interest.
  • Leverage employer-matching programs: If your employer offers a retirement savings plan like a 401(k), Workplace Pension Scheme, Employees Provident Fund (EPF), or a similar program, ensure you contribute at least enough to get the full employer match. This is essentially free money that can significantly boost your retirement savings.
  • Consider additional voluntary contributions: If you're in a position to do so, consider making additional voluntary contributions to your retirement fund. This can significantly enhance your savings over time.
  • Invest in a diversified portfolio: Diversifying your investments across a mix of assets can help balance risk and returns. A well-diversified portfolio might include a blend of stocks, bonds, and other types of investments. If you're not quite ready to engage with a professional, don't underestimate the power of self-education. The internet is a treasure trove of information, with platforms like YouTube and various financial blogs offering a wealth of knowledge on investment strategies and portfolio diversification. However, remember to verify the information from reliable sources and consider seeking professional advice when you're ready to take the next step.
  • Plan for the unexpected: Life can take unexpected turns. Having a 6-month emergency fund can help you handle unexpected expenses without dipping into your retirement savings.

Navigating retirement planning as an expatriate.

Life can take us in unexpected directions, and for some, this might mean moving abroad for work. This brings unique challenges and opportunities for retirement planning. 

Understanding 401k rollovers for American expatriates.

Consider the case of John, an American expatriate working for a non-American company abroad. John had been contributing to his 401k while working in the U.S. However, since his move, he is no longer able to make contributions to his 401k. This is where strategic retirement planning comes into play. Since John is no longer contributing into his 401K, he now has the option to shift this 401k into an Individual Retirement Account (IRA) through a 401k rollover. This essentially switches a company pension into a personal pension, bringing many benefits including the ability to now be able to add contributions in the future. This can be a complex process and should often be consulted with a financial advisor. 

While an IRA can be used as an alternative to a 401K, it is important to be aware that it is subject to a maximum annual allowance, and may not be available to some expats who claim the Foreign Earned Income Exclusion on their U.S. tax returns. If saving towards retirement in an IRA is not available or the annual allowance is not enough to reach your goal, then it is important to have investment options that will allow you to continue to save towards retirement as an expatriate. It is equally important that these investment options are U.S. compliant to avoid unnecessarily high taxes and reporting obligations.

Global retirement planning solutions with Melbourne Capital Group.

No matter where you are from in the world, our private wealth team is prepared to review your existing pensions and suggest alternative savings or investment platforms. Our goal is to assist you in maintaining momentum towards achieving your retirement or financial goals. Email us at info@melbournecapitalgroup.com or fill in the form below for more information.

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