It’s been said that once we make our habits, then our habits make us.  A habit that people who retire well maintain is the practice of deferred gratification.  Unfortunately, it appears that Millennials who grew up with everyone on every team getting a trophy every time have developed the habit of getting instant gratification.

Let me begin by making something as clear as I can, that for some reason often blows many people’s minds. If your goal in one year, after accounting for Social Security and any pension income, is to receive additional income of $40,000, by using the 4% withdrawal it rule, it means you will need to place $1,000,000 in an account where the yield is 4% today to achieve your goal one year from now. We can all agree that $40,000 isn’t a lot of money anymore, and we used to think that being a millionaire made you rich, but things have changed. Remember this is just one year. So, if your goal is sometime in the future, you need to account for inflation.

If you wanted to create an income of $100,000 in a year, simply multiply that goal by 25 to see that the amount invested with a 4% yield is $2,500,000. With pensions becoming history for many workers and Social Security becoming questionable for lots of future retirees, it is clear the job that must be done is the responsibility of those who work for a living. Which means it is vital for each of us to develop good habits that can stand the test of change and time. Instead of planning for their future, “Nearly 60% of investors 18-34 say they already have taken money from their retirement account,” according to research from E-Trade Financial reported Sarah O’Brien, CNBC,  August 21, 2018.

In addition to carrying most of the $1.4 trillion in college loans, Millennials wages are lower than their parents’ income in their 20s: “$40,581 vs. $50,910 (inflation-adjusted) earned by Baby Boomers in 1989,” according to a study by advocacy group Young Invincibles in 2017.

As you can see in the chart below, the top three reasons identified for the withdrawals are medical emergencies, education costs, and unemployment. Do not miss the fifth reason, to simply spend on myself/family. In fact, 36% made a withdrawal for these reasons; big purchases, vacations or spend it on themselves or family.

Why people tap their 401(k)s early:

Reason for early withdrawal Under age 34 Ages 35-54 Age 55 & over
For a medical emergency 23% 13% 3%
To pay for education 22% 16% 3%
Because I became unemployed 17% 12% 3%
To make a large purchase 16% 12% 3%
To simply spend on myself/family 13% 6% 1%
To spend on a vacation 7% 1% 1%
Other 1% 3% 3%

Source: E*Trade’s StreetWise quarterly study

Sarah O’Brien reminds us that withdrawals from a traditional retirement account, before 59 ½ not only generates an income tax bill but, unless one of a few exclusions are met, there is also a 10% early withdrawal penalty. When your Millennial loved one tells you the intention is to put the money back, you need to know that is not likely to happen. Some of the money might show up again, but the total may not be 100%. More significantly, when $10,000 is removed from the account, the earnings and interest on the original value would be lost over several decades.

By example, In spite of 2000-02 and 2007-08, $10,000 invested January 1988 in the S&P 500 index would have been valued at $211,900 by the end of the year 2017, according to the MoneyChimp online calculator. With continued contributions, $200,000 is a good start to help get to what will certainly need to be more than $1,000,000 in the future.

The E-Trade Financial study shows that just as Millennials have increased 401(k) withdrawals by 31% since 2015, the Generation X group has increased withdrawals by 30%, with 45% turning to their 401(ks) for cash.

Regardless of what the stock market does, with gaps in employment Millennials will not pay as much as they would have in Social Security. Further, the age of becoming eligible for Social Security benefits may be advanced. They are not likely at all to have a pension. These are habits that can well contribute to living with a lot less money for life.  Unless something changes, the Millennial calamity will become America’s burden.

Or we can all learn and apply something from our elders. At 90 my mother who loved being the responsible party for paying her own bills asked me to go online to confirm that her bank balance was in good order. I was astonished to see that every month she automatically moved money from her checking account to her savings account. I gave my mother a high five because I could not only confirm that her accounts were in good order, but  I had to thank her for teaching me to begin early by setting aside allowance money for those rainy days as well as a bright future. Little did I realize that the practice also sowed the seeds for me to become a securities and insurance broker. No regrets.

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