Financial Freedom in Retirement: A How-To Guide for Millennials

Sean Bricmont, Portfolio Manager, First Republic Investment Management
April 8, 2019

For a young, ambitious professional, it can be a challenge to figure out the most effective roadmap to reach your financial goals. Between the competing priorities of paying off student loans, starting a family and purchasing a first home, the notion of retirement can seem a long way off.

For many, financial freedom comes as the result of a long-term disciplined investment approach. The good news for millennials is that the earlier they start investing, the higher their probability of success can be.

Want to build your own path to financial freedom? Here’s how:

Start Small

It’s easy to get overwhelmed by unfamiliar investment choices. When starting out, your primary objective should be to develop a habit of investing. Start small while you learn the terminology and manage any investment apprehensions. Balance retirement goals with current financial needs like student loans and housing payments. The key is to start where you’re comfortable -- most likely with your employer's 401(k) plan -- and then increase your contribution percentage over time. As you gradually max out your employer's retirement plan options, you can branch out to add a Roth or Traditional IRA, and eventually a taxable investment account. 

Get In Early

Time is often a young investor’s greatest asset, and it can be underestimated. The earlier you start contributing to retirement, the greater the potential for long-term investment growth.

Take the following three hypothetical investors, for example. One starts investing at age 25 (Investor A), the next at age 35 (Investor B), and the last at age 45 (Investor C). Each invests the same lifetime dollar amount and earns the same hypothetical investment return, and yet Investor A earns almost $2.8 million dollars while Investor C earns just $543,000. Those very different investment results will yield drastically different retirement lifestyles. The only difference in strategy? Timing. The longer your money has to compound, the better off you're likely to be over the long term.

Retirement Planning for Millennials

Adopt Discipline

Set a percentage of your income to automatically invest in your employer’s 401(k) or other defined contribution plan. By being consistent over a defined investment horizon, an investor can better ride out the highs and lows of the market. Invest $100 when the market is down, and you’ll buy a greater number of shares. That same $100 investment during a market peak will purchase fewer shares. This strategy is known as dollar cost averaging, and is the basic tenet that enables many investors to buy low and sell high.

Investors who try to time the market, weaving in when they expect market highs and out when they expect lows, are often subjected to severe losses. Market movements are notoriously unpredictable, and even the most experienced of investors are unable to pinpoint exact market movements.

Diversify Your Portfolio

It’s easy for assets to drift into allocations that are too risky or too conservative to meet overall investment needs if you don't have a strong asset allocation plan. Having too many cash equivalents might prevent you from outpacing inflation. Having too much stock might cause your portfolio to lose a good portion of its value rapidly. The key to developing an appropriate asset allocation strategy hinges upon knowing your time horizon, but also on knowing yourself. Your wealth advisor can help you determine your tolerance for risk and develop a target asset mix that can help your assets grow while also allowing you to sleep at night.

In the end, financial freedom is about developing a plan for what you want to do -- and figuring out how to get there. Whether that means quitting your job, retiring at 35, or launching a new company, a well thought out plan is the surest way to reach those goals.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. First Republic does not provide tax or legal advice. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.