Financial Planning, Retirement

Millennials Can Still Achieve A Comfortable Retirement

3/16/18 8:00 AM

millennial-working-in-coffeeshop.jpgEarlier this week we learned that many Millennials want to do a better job of saving. That is encouraging since young adults have a lot of ground to make up in terms of retirement preparedness. For example, a new survey conducted by the National Institute on Retirement Security (NIRS) found that 66 percent of working Millennials have absolutely nothing set aside for retirement. Further, a recent study by Boston College’s Center for Retirement Research (CRR) found that adults ages 25-35 today are at risk of being far less prepared for retirement than older generations were at this same stage in life.

Specifically, the median household net-wealth-to-income ratio for this cohort of Millennials is just 40 percent, compared to 53 percent for Generation-X at ages 25-35, and 47 percent for Baby Boomers. These gaps become more pronounced over time, and the researchers attribute a part of the problem to relatively high levels of student loan debt, low rates of homeownership, and a lack of participation in retirement saving plans. What is worse is that life expectancy continues rise. That should be good news but from a financial standpoint it means Millennials will have longer retirements to fund than older generations assuming they exit the workforce around the same age.

Further, financial assistance in retirement from Social Security is not guaranteed since the long-term sustainability of this government program is uncertain. In fact, the Social Security Administration’s most recent annual trustees’ report projects that Social Security, ceteris paribus, will be able to pay only about 75 percent of the benefit retirees are currently awarded after the program’s Trust Fund is exhausted in 2034. This should provide yet another reason for Americans to strive to reduce their old-age, government-related financial dependency, and one of the best ways to do so is to start saving for retirement as early on in one’s working career as possible.

An analysis by Wells Fargo, for instance, estimates that a hypothetical 25-year-old with a starting annual salary of just $32,000 is capable of accumulating $1 million by age 65. Key assumptions behind this positive outcome are that people remain consistent with their saving and periodically raise their annual contribution rate. Employers can help workers meet such requirements with a combination of automatic enrollment and automatic escalation, two increasingly popular plan features that ensure workers of all ages take full-advantage of workplace-provided 401(k)s.



Sources: NIRS, CRR, U.S. SSA, Wells Fargo

Post author: Charles Couch