Here are the 10 best retirement plans for millennials.
For millennials, retirement can feel like a distant concept, but the planning you do today is the single most powerful factor in achieving long-term financial freedom.
With long time horizons and the magic of compound growth on your side, starting now is a financial superpower. At ShockTrail, we’re focused on demystifying finance to help you build a secure future. This guide breaks down the best retirement plans and accounts available, helping you choose the right strategy to start building wealth for the long term.
Why Millennials Must Prioritize Retirement Savings Now
Millennials are navigating unique financial challenges, from student loan debt to a changing job market. However, their greatest asset is time.
An dollar invested in your 20s or 30s has the potential to grow exponentially more than a dollar invested in your 50s, thanks to the power of compounding.
The best retirement plans offer significant tax advantages that turbocharge this growth, making them the most efficient way to build a nest egg. Choosing the right plan and starting today is the key to a comfortable and stress-free retirement.
10 best robo-advisors for beginners
Real-World Scenarios: Building a Millennial Retirement Strategy
Scenario 1: The Employee with a Company Match
- The Millennial: Sarah, a 28-year-old graphic designer whose employer offers a 401(k) with a 5% company match.
- The Goal: To take full advantage of her workplace benefits and start saving consistently.
- The Solution: Sarah’s first move is to contribute 5% of her salary to her company’s 401(k). This ensures she gets the full company match, which is essentially a 100% return on her investment. After securing the match, she opens a Roth IRA with a robo-advisor like Fidelity Go® and contributes additional savings there. This “hybrid” approach gives her both the free money from the 401(k) match and the tax-free growth potential of the Roth IRA.
Scenario 2: The Freelancer and Gig Economy Worker
- The Millennial: David, a 32-year-old freelance writer with a variable income.
- The Goal: To find a retirement plan that is flexible and allows him to save aggressively during high-income months.
- The Solution: David opens a SEP IRA (Simplified Employee Pension). This plan allows him to contribute up to 25% of his net self-employment income, giving him a much higher contribution limit than a traditional IRA. In years when he has a big project, he can contribute a large amount to lower his taxable income. The flexibility of the SEP IRA is a perfect fit for his entrepreneurial career path.
Scenario 3: The Health-Conscious Saver Using a “Stealth IRA”
- The Millennial: Maria, a 35-year-old who has a high-deductible health plan (HDHP) through her employer.
- The Goal: To save for both current healthcare costs and future retirement in the most tax-advantaged way possible.
- The Solution: Maria maxes out her Health Savings Account (HSA). She uses the account to pay for current medical expenses with pre-tax money. But her main strategy is to pay for most of her current medical costs out-of-pocket and leave the money in her HSA invested for the long term. She knows the HSA has a unique triple tax advantage: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses in retirement are also tax-free, making it a powerful, supplemental retirement account. You can learn more about this strategy from financial experts at NerdWallet.
Comparative Breakdown of Top Retirement Accounts
Note: Contribution limits are subject to change annually. Check the official IRS website for the most current figures.
The 10 Best Retirement Plans & Strategies for Millennials
- Company 401(k) with a Match: This is always priority #1. If your employer offers a match, contribute enough to get the full amount. It is free money and the best return on investment you will ever get.
- Roth IRA: The best individual retirement account for most millennials. You contribute with post-tax dollars, but your investments grow and can be withdrawn in retirement completely tax-free.
- Traditional IRA: A good option for millennials who are in a higher tax bracket now than they expect to be in retirement. Contributions may be tax-deductible, lowering your current taxable income.
- SEP IRA: The go-to retirement plan for freelancers, contractors, and the self-employed, offering high contribution limits and easy setup.
- Solo 401(k): A more advanced option for self-employed individuals with no employees (other than a spouse). It allows you to contribute as both the “employee” and the “employer,” enabling very high contribution amounts.
- Health Savings Account (HSA): The “stealth IRA.” If you have a high-deductible health plan, an HSA is the most tax-advantaged account in existence, offering a triple tax break.
- Taxable Brokerage Account: After you’ve maxed out your tax-advantaged accounts, a standard brokerage account offers unlimited investment potential and the most flexibility, with no restrictions on when you can withdraw your money.
- Robo-Advisor Investing: Not a plan, but a strategy. Using a robo-advisor is the perfect way for millennials to start investing within these accounts. It’s low-cost, automated, and diversified.
- Real Estate Investing (e.g., REITs): For those interested in real estate without the hassle of being a landlord, investing in Real Estate Investment Trusts (REITs) within your retirement accounts can provide diversification and income.
- Spousal IRA: If one spouse is a high earner and the other has little or no income, the working spouse can contribute to an IRA on behalf of the non-working spouse, allowing the couple to save more for retirement.
Frequently Asked Questions (FAQ)
How much of my income should I save for retirement?
Financial planners often recommend saving 15% of your pre-tax income for retirement. If that’s not possible, start with a smaller percentage and increase it by 1% each year. The most important thing is to start now.
Roth vs. Traditional: Which IRA or 401(k) is better for me?
A Roth is generally better if you expect to be in a higher tax bracket in retirement. You pay taxes now, but get tax-free withdrawals later. A Traditional account is better if you are in a high tax bracket now and want the immediate tax deduction.
What should I invest in within my retirement account?
For most millennials with a long time horizon, a diversified portfolio of low-cost index funds or ETFs (like those tracking the S&P 500 or a total world stock market) is a simple and highly effective strategy.
What happens to my 401(k) if I leave my job?
You have a few options: you can leave it with your old employer (if the balance is high enough), cash it out (not recommended, due to taxes and penalties), or—the best option—initiate a rollover into an IRA or your new employer’s 401(k).
What is “compounding”?
Compounding is the process where your investment earnings begin to generate their own earnings. It’s the magic that makes long-term investing so powerful. At ShockTrail, we see it as the most critical concept for young investors to understand.
Can I withdraw money from my IRA before I retire?
Generally, you will face a 10% penalty and income taxes for withdrawing from a Traditional IRA or 401(k) before age 59½. With a Roth IRA, you can withdraw your original contributions (but not the earnings) at any time, tax-free and penalty-free.
What is a “rollover”?
A rollover is the process of moving money from one retirement account (like an old 401(k)) into another (like an IRA) without triggering any taxes or penalties. It’s a great way to consolidate your retirement savings.
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