With age comes responsibility, so if you're a young adult in your 20s or 30s, chances are you've been introduced to the realities of adulthood. While you're excited by all the opportunities life has to offer, you're also aware of your emerging financial responsibility. In this episode of Money Script Monday, Luke shines some light on millennials facing a unique set of financial challenges and what they can do to prepare themselves for a successful retirement.

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Video transcription

Hello, and welcome to another episode of Money Script Monday. My name is Luke Geller and today, we're going to talk about millennial’s guide to tax-free retirement.

The reason I wanted to talk about this is really because that's the age group I'm in, it's the generation I'm in and it's something that I'm dealing with and see every day from my friend group, from my siblings.

I get these articles that have been shared with me. I get information being sent to me and not all of it is true, not all of it is relevant.

So I wanted to kind of break that apart, look at everything. And really give at least some stepping stones of how to get from point A to Z, which is being in retirement.

Different circumstances

Today we're going to look at really how a millennial is in a different set of circumstances than any other generation before them.

And what I mean by that is when we are entering the workforce, we are entering the workforce with the most debt that's ever been there or that any generation has ever had entering the workforce, which is putting us way behind any other generation before us.

On top of that, the housing market right now is at an all time high, the highest it's been since 2007.

When you combine those two things, it leads to not a great set of circumstances for us.

When you look at the two different routes that you can go, you can go the traditional route of retirement, which isn't for us because it's not the set of circumstances we're in.

But that route is you go get an education, get a job, stay at that job for 30 to 35 years, invest in that pension retirement plan, retiring at 65 and then living happily ever after.

And that's just not the narrative that is around these days, especially, for our generation.

So the new narrative is we need to look at all these different sets of circumstances and come up with a different way, and a way that's better for us of doing things.

How can we do that? What are some things that we can do?

The new way

Let's take a step back and look at the situation we're currently in.

When you look at where millennials currently are in retirement, you have the average millennial has saved about $67,000 in the retirement account.

If you take a closer look at that, that number is not even that high.

If you look at the median number, it's closer than $19,000 in person's retirement account or millennials retirement account, and two thirds, about 66% don't even have anything saved for retirement, which is a huge number.

Yes, we have this 33% that do and that's of the entire millennials in the workforce, which is a scary thought.

The reason for that is when you look at it, you're coming out of college, you have this massive debt load that you have to pay off. You can't buy a home and buying a home is really the way that generations before us build their wealth by having that home equity, that home equity that's grown.

We have to rent longer.

We have to pay off this debt first.

There are things that we have to do.

And then on top of that, most of the advice out there is invest in your company's 401(K), especially, after the match.

There are a couple issues with that.

When you look at where Millennials are at, we're changing jobs every one to two years.

Long gone are the days where you're going to stay with a company for 30 to 35 years.

What we're going to do is we're going to work for a company for a year, build up your LinkedIn profile, your resume and then move on from there and try and instead of getting in a promotion within your company, you're looking at outside sources and competition to get a higher salary, to get a pay bump when you do that.

If you're investing in your company's 401(k) that has a match, the vesting period is probably longer than one or two years.

On top of that, you have to take that 401(k) and move it to your new company’s 401(k) or else it's going to stay there and you don't know what's happening with it, where it's at, is it growing, is it not, are you losing money?

I had a friend in a similar situation where he just withdrew that money altogether because he said it was easier to just take the penalty and take the taxes which I would not recommend than just moving it over to a new company. But I do see where he comes from with that.

So then where do you start?

Instead of looking at the huge massive number of retirement, where can we go from there? How can we even take that first step?

I kind of look at it as going into the gym.

Think about it, new years is right around the corner and everyone's going to make their new year's resolution to get in shape, go work out.

If you're one of those people, and you're doing that, and I'm sure you've done this before, you go to the gym the first day and it's hard, you don't know exactly what you're doing, you don't have a set plan, you're going there, you're working out, maybe putting up some dumbbells, just trying to get a burn.

And then, finally you get home, you're tired from working out, you're sore.

The next day you're even more sore. Then you have to wake up again, it's hard, that's the same thing as starting a financial plan for retirement.

It's not easy, but the longer you do it, just like when you're working out after about two, three weeks, you're not going to be as sore anymore, it's going to be easier to get up.

Same if you're saving for retirement.

If you're paying off that debt that you have entering the workforce, it gets a little bit easier and easier. The further you go along and the more you do it, you don't even notice that money coming out of your account anymore, etc.

If you look at retirement experts are saying, "You need to save at least 15% of your income."

Well, that's not that easy to do right away. But if you take it step by step, it's a little bit easier.

So, what are some things we can put our money into? Because, again, 401(k) is an option. But if we're changing jobs every so often, if we aren't getting that match because it's not going to be vested by the time we move and change jobs or change companies, what do we do?

Tax-free options

Let's take a look at some tax-free options.

The reason I want to look at tax-free options is because, think about this, as millennial, we're probably in the lowest tax bracket we will ever be in.

Hopefully, you will be making more money in the future when you're 40 and 50 than you are right now in your 20s and 30s, right?

If you're doing that, why would you want to take money and not in defer taxes to when you're in a higher tax bracket later on in life?

It doesn't make a ton of sense.

And on top of that, if you look at the general U.S. tax rates throughout history, we're in one of the lowest tax rates we've ever been in so that's kind of a doubleheader there of being in an extremely low tax environment in where you're at.

Why not pay the taxes now, let that money grow tax-free and then take it out tax-free?

Option #1: Roth IRA

So here are a couple of solutions, you have a Roth IRA and this is really where I would start.

Again, if we're taking those baby steps, if we're waking up that first day, January 2nd, going to the gym and getting that first workout, and this is what I would relate to that, is that Roth IRA.

The reason for that is because, again, you have tax-free growth.

The money you put in this account, it's going to grow tax-free and then you have access to the principal.

Anything that you have put in this account, you can take out without any penalties, without any fees, without any taxes, as well.

You can't touch anything that you've earned in the account, but all of the principal, you can definitely take out if you need to in a bond.

And then, finally, you get tax-free distribution.

Once you hit that retirement age, you can take that money out tax-free and not have to worry.

Now, what are some of the cons? Why wouldn't we put all our money into this?

Well, one, you can't. There's a limit to how much you can put into this account.

The limit is $5500 if you're under the age of 50.

So, if there's a limit, that's a great starting point, but you can't continually once you're making more money and you're in that second, third step to building a retirement nest egg, you're going to want to look elsewhere.

And then, finally, you also have market risk in the Roth IRA because it's going to be tied to the market, it's going to go up and down with the ebbs and flows of the market.

But that's not, necessarily, a bad thing because you have so much time before you do have retirement to let that grow.

And if you do lose some money, you have the time and the potential for it to grow back.

So again, if you hit these contribution limits in a Roth, then what do you do?

Option #2: Indexed Universal Life

Well, there's a vehicle called indexed universal life (IUL).

It's a life insurance vehicle, but it's a tax-free vehicle and a life insurance chassis.

What we're doing is we're taking advantage of some of tax codes that are written in law that allow us to grow our money tax-free and tax-deferred inside of a life insurance vehicle without some of the limits that you have in a Roth IRA.

You can put as much money as you want into an IUL if it's structured correctly.

The benefits you get from it are tax-free growth and tax-free distribution.

And then a little added caveat, you get some market protection because you're not exactly in the market.

You're just tied in mirror in the market, which can be very crucial. Especially, when you're building that nest egg.

You have zero floor so you're not going to be negative in your interest accounts. But you have upside, sometimes it's capped out, sometimes you don't even have a cap so it's unlimited growth on that, which can be very nice.

Some of the downsides that you have in an IUL is that you don't have some of the early liquidity that you get in a Roth.

That's not necessarily a bad thing either because, again, these are for retirement, these are growing, you want them to grow and take this out when you're 60, 65 or 70 to supplement your retirement income.

And then, finally, another downside risk is there is a cost of insurance.

But, again, because of our generation, our age, that cost is minimal because we're so young, we have a long life expectancy.

Millennials are going to live longer than any generation before us and it's continuing to grow.

And so those are some of the benefits that you have.

Those are kind of the two first steps: building that Roth IRA, paying off the debt, building that Roth IRA up and then also finally putting money inside an IUL for that final piece of retirement to help you grow and help that retirement grow.

Those are three keys that you want to do and that we can look at.

And, again, all we're trying to do is we're trying to take these steps because when you look at the entire picture, it can get a little overwhelming.

But when you break it down step by step and piece by piece, then eventually you're going to get to where we all want to be, which is happy and in retirement and doing exactly what we want to do.