4 Retirement Myths Millennials Can't Afford to Believe

Between student loan debt and a tough job market, millennials face some tough challenges to retirement planning. Buying into certain myths about saving makes things that much harder. Today, I'm taking a look at the biggest retirement misconceptions young adults buy into and offering some tips on building a nest egg in your 20s.

1. Paying off student loans is more important than saving

An estimated 40 million Americans are plagued with student loan debt and 20-somethings are borrowing record amounts to finance their education as tuition prices keep climbing. On average, grads are walking away from school with close to $30,000 in loans and for many millennials, the burden prevents them from working towards major goals like buying a home or getting married.

Some 20-somethings are so concerned about getting rid of their loan debt as quickly as possible that they're skipping out on saving for retirement. The main driver behind this myth is the assumption that that the interest you're going to pay on your loans always outweighs anything you'd earn by investing. Running the numbers tells a different story, however.

Assume you have a $30,000 loan balance at 6 percent interest with monthly payments of $330. On a 10-year repayment plan, you'd spend close to $10,000 in interest but if you paid an extra $100 a month, it would come to just under $7,000 and take three years off the repayment schedule. Saving $3,000 is nothing to sneeze at but consider what you'd have if you invested that extra $100 in your 401(k) instead.

If you saved $1,200 a year for 10 years while making your regular loan payments, you'd have more than $25,000 towards retirement, assuming a 7 percent annual return and a 50 percent employer match. Compared to what you'd save by paying off your loans earlier, it's very easy to see which one adds up to the better deal.
Tip: Refinancing your private student loans can yield a lower rate and reduced monthly payment if your current loan terms are too difficult to manage. Keep in mind that you'll need a cosigner if you haven't established your credit history yet.

2. There's no point in saving in a 401(k) if you plan to change jobs

Compared to their older colleagues, millennials spend a median of three years with an employer before moving on to greener pastures. All that moving and shaking can be good for your career if you're working your up towards bigger and better things but it doesn't bode well for your retirement. If you know you're going to change jobs down the line, you may think that saving in your 401(k) is pointless but that's a costly mistake.

Saving money in an employer's retirement plan makes sense for a couple of different reasons. One, the money you save comes from your pre-tax income which can give you a lower tax bill when you file your return. More importantly, you have the opportunity to get free money if your employer matches your savings.

If you got a job making $45,000 a year and deferred 6 percent of your pay into the plan, you'd accumulate about $9,000 over a three-year tenure with a 7 percent annual return. With a 50 percent employer match, your balance would balloon to $13,500. That's a decent amount to get the retirement ball rolling with so it's foolish to assume that participating in a 401(k) is a waste of time if you know a career move is on the horizon.
Tip: If you plan to rollover your 401(k) to an IRA when changing jobs, opt to have the funds transferred directly to your new account to avoid a tax penalty.

3. IRAs are only for people who don't have access to a 401(k)

Saving in your 401(k) is a good start to your retirement nest egg but 20-somethings shouldn't make the mistake of limiting themselves to this one option. Adding to your savings with an individual retirement account allows you to grow your assets that much faster, and you get some tax benefits to boot.

IRAs come in two flavors, traditional and Roth. A traditional IRA gives you a deduction on your contributions but you'll have to report your withdrawals as income down the road. A Roth, on the other hand, doesn't offer any immediate tax benefit since it's funded with after-tax dollars. The upside, however, is that your qualified withdrawals are tax-free.

Typically, a Roth is better suited to someone in their 20s because at this stage in your career, you're probably not making a huge amount of money which means you wouldn't necessarily need an extra tax deduction. If you're expecting to be in a higher income range when you retire, being able to make tax-free withdrawals can keep your tax bill to a minimum.
Did you know? IRAs and IRA CDs feature the same contribution limits and tax rules but they're substantially different in other ways. An IRA is a riskier investment than an IRA CD but the rate of return is generally much higher as well.

4. A Health Savings Account isn't necessary if you're young and healthy

If you're covered by a health insurance plan at work, you may be overlooking a valuable retirement savings tool. Health Savings Accounts are offered as part of a high deductible plan and while they're intended to be used for medical expenses they can also double as a retirement account.

When you're younger, you may not see the need for an HSA but if you don't have access to a 401(k) or you've already maxed out an IRA, you can use it to supplement your savings. The money you put in to an HSA is tax-deductible and any withdrawals you make for health care expenses are tax-free. If you end up taking money out for something else along the way, it's subject to income tax and a 20 percent tax penalty. The penalty goes away after age 65.

Are you letting these or any other myths stop you from saving for retirement in your 20s? Tell us about it in the comments.