Increasing life expectancies, the challenges of eroding Social Security benefits, and rising healthcare costs are together creating a situation where funding retirement is likely to be a lot more expensive than it has been in the past. Although amassing a larger nest egg could help young Americans prepare for a costlier retirement, many Millennials have doubts that they will be able to save enough money to achieve their desired old-age lifestyle. At least that is what a new report from Wells Fargo suggests, which found that nearly two-thirds (64 percent) of surveyed Gen Y adults believe that they will never accumulate $1 million in savings over their lifetime.
Much of this pessimism is likely related to the 41 percent of Millennial respondents who said that they have yet to begin setting any money aside for retirement, of which 64 percent attributed their delayed start to simply “not making enough money.” However, many of these young adults are possibly underestimating their ability to save because a hypothetical 25-year-old with a starting annual salary of just $32,000, according to an example in the Wells Fargo report, could still accumulate $1 million by age 65. Some of the key assumptions behind this positive outcome are that people begin saving for retirement early on in their working career, remain consistent with their saving, and increase the annual rate of saving over time.
Fortunately, all three of those requirements can be met with a combination of automatic enrollment and automatic contribution escalation, two popular plan features which help ensure that more young adults take full-advantage of an employer-sponsored 401(k). In fact, the growing adoption of auto-enrollment and auto-escalation is likely a big factor behind the new data from Fidelity Investments which showed that in the second quarter of 2016, the average account balance for Millennials who have been continuously active in their 401(k) plan for at least a decade reached a record $92,900. That is an increase of more than 10 percent in just the past twelve months.
Returning to the Wells Fargo survey, most Millennials encouragingly appear to recognize the importance of saving for retirement, as well as the value provided by an employer-sponsored 401(k) plan. Specifically, 85 percent of Gen Y respondents said that they view saving for retirement as an important part of becoming a “financial adult,” and more than two-thirds felt that having access to a 401(k) plan is “extremely or very important.” Moreover, almost three-quarters (74 percent) of surveyed Millennials reported skepticism that Social Security benefits will still be available for them at retirement, and 82 percent said that “seeing people who are comfortably retired today” motivates them to save more for their own retirement. Other noteworthy findings:
- Millennials who have a workplace retirement plan began contributing to the plan at an average age of 24.
- 73% of Millennials support auto-enrollment in 401(k) plans
- 71% of Millennials say they would value a financial coach to help them understand the complexities of their retirement plan.
- 16% of Millennials say they are “extremely” or “very” interested in using a digital advisory service for financial planning.
Sources: Wells Fargo, Fidelity InvestmentsPost author: Charles Couch