What is the recommended retirement savings by age? It appears that millennials and Gen Z are falling behind on their retirement savings, according to a recent study by Fidelity.
Robert 'Bob' Powell, and award-winning author and retirement expert, Anne Lester, break down the findings and provide retirement advice for millennials and Gen Z, including their tips on how to pay down student loan debt while still saving for retirement.
Advice for millennials and Gen Z (00:28)
In an analysis of its 23.3 million 401(k) participants at the end of Q1 this year, Fidelity found that the average balance for Gen Z increased 15 percent from the fourth quarter to $11,300, compared to an 11 percent increase to $59,800 for millennials. Across all generations, the average balance rose 6 percent to $125,900.
Lester believes we should take those numbers with a grain of salt. "Number one, the oldest Gen Zers are 27, so they have a little more time," Lester explained. "Number two, there is a lot of job hopping happening with younger workers. And so, to what extent have those people worked for the same company for the entire time or rolled their money over into the new plan? So it's possible that those numbers may be slightly understating the amount people have actually saved."
Powell and Lester broke down the acronym S.T.A.S.H., discussed in Lester's book, 'Your Best Financial Life: Save Smart Now for the Future You Want'. According to Lester, S.T.A.S.H. stands for the 5 things the next generation should be thinking about to build their retirement savings.
S. Save for a rainy day
T. Tax advantage savings
A. Assess your budget and pay off debt
S. Stay the course and max out your retirement savings
H. Have fun!
Lester explained, "I think executing that S.T.A.S.H. is really about making sure you've got the emergency savings fund. You have eliminated all of your high interest rate debt, and you are putting 10 to 15 percent into that long-term savings."
FOMO and present bias (15:50)
FOMO, or the fear of missing out, is one factor that can severely affect retirement planning. Powell and Lester discussed FOMO, present bias, and advice from Lester's book, 'Your Best Financial Life: Save Smart Now for the Future You Want'.
"One of the most powerful things that is now helping Gen Zs and anybody who changes jobs is getting automatically enrolled," Lester added. "So is your employer automatically increasing your savings rates? That's another hack. Most people stay with the plan. They don't drop out because they know they should. If your employer doesn't do that for you automatically, you can do it to yourself by, again, either asking them to increase your contribution rate or just saying ... I'm going to bump up my rate. Those are hacks that will help you stay on track."
Ask Bob (21:00)
In our special segment, Ask Bob, Bob answers the most common retirement and investing questions from our listeners.
Question:
Is there an upfront charge, besides the income tax or income related monthly adjustment amount (IRMAA), for an IRA to Roth conversion?
Answer:
There is no charge for a Roth conversion. However, the amount converted from the traditional IRA to the Roth IRA is subject to ordinary income tax in the year of the conversion. This includes any pre-tax contributions and earnings that were in the traditional IRA. There may also be what Andy Ives, an IRA expert with Ed Slott & Co., calls 'stealth taxes' due.
For instance, Medicare beneficiaries may have to pay what’s called an income related month adjustment amount or IRMAA. IRMAA is an extra charge added to the premiums for Medicare Part B (medical insurance) and Part D (prescription drug coverage) for beneficiaries with higher incomes. Other individuals who are enrolled in an affordable care act health insurance may learn that their advanced premium tax credit is reduced or eliminated because the Roth IRA conversion increases your modified adjusted gross income.And lastly, there’s a chance that a Roth IRA conversion could push you into a higher tax bracket.
Question:
I first opened a Roth IRA in 2020. I have since put money in the Roth in 2021, 2022, and 2023. I understand you have to wait five years before you can begin withdrawal without any taxes, principal and gains. Based on this I can take out my 2020 money in 2025? Correct? When can I withdraw my 2021 money? 2025 also or is it five years from when money went into account? So, 2021 I can withdraw in 2026, 2022 in 2027 and so on? Or is all money available for withdrawal beginning in 2025?
Answer:
You can receive the earnings on all of your Roth IRA contributions tax-free once you satisfy a five-year holding period and you are over age 59 ?. The five-year period starts on January 1 of the year you first fund any Roth IRA. Since you opened your first Roth IRA in 2020, your five-year period ends on 12/31/24. So, all of your Roth funds are available tax-free starting in 2025. Since you’re over 59 ?, there also won’t be a penalty, according to Ian Berger, an IRA analyst with Ed Slott & Company.
Video highlights:
00:28 - Advice for millennials and Gen Z to catch up on retirement
03:00 - If I switch jobs, should I roll over my 401(k)?
06:55 - How to pay down student loan debt and save for retirement
11:20 - Importance of insurance while saving for retirement
12:40 - S.T.A.S.H. - How the next generation can build their retirement savings
15:50 - FOMO - How to plan for retirement without missing out
18:45 - Anne's advice from 'Your Best Financial Life'
21:00 - Ask Bob - Is there an upfront charge for an IRA to Roth IRA conversion?
22:45 - Ask Bob - When can I take money out of my Roth IRA?
Retirement planning doesn’t mean locking up your money for a rainy day and forgetting about it. Planning your future means reacting to events today. Decoding Retirement gives you the tools to navigate the years ahead, and take action now!
Yahoo Finance's Decoding Retirement is hosted by Robert Powell, and produced by Zach Faulds and Alexander Frangeskides.
