Increasing life expectancies, the challenges of eroding Social Security benefits, and rising healthcare costs are together creating a situation where many Americans could wind up having to finance costlier retirements that are longer in duration than the number of years spent in the workforce. It is therefore crucial for young adults to start saving for retirement as soon as possible, and fortunately a lot of Millennials (ages 18 to 34) appear to already be taking the necessary steps to ensure old-age financial security. A recent Natixis survey, for instance, found that Millennials first enrolled in a retirement savings plan at an average age of 23, much earlier than Generation X (age 27) and Baby Boomers (age 31).
Similarly, a Ramsey Solutions study found that among surveyed Millennials who reported that they are actively saving for retirement, more than a third (39 percent) said that they are setting aside as much as 9 percent of their income each year. That is not too surprising since Gen-Y respondents cited 401(k) assets and other personal savings as their expected primary sources of retirement income, whereas older respondents reported a much heavier reliance on Social Security benefits. Moreover, a new Bank of American Merrill Lynch (BofAML) report found that Millennials were three times more likely than Gen-X and Baby Boomer workers to rank an employer’s retirement plan as the most important factor in determining whether they will accept a job offer.
Seven in ten Gen-Y respondents described their investment approach as “hands on,” compared to 60 percent across all age groups. One reason for this could be the rise of the target date fund (TDF), the hybrid type of mutual fund that automatically adjusts the mix of stocks, bonds, and cash equivalents in its portfolio so that the holdings are more appropriate for a particular investor’s nearness to retirement. Indeed, the Natixis study found that Millennials were more likely to be participating in a TDF, either because they were defaulted into the fund or selected this investment option outright. However, TDFs are designed with the assumption that all of a person’s assets will be invested in such funds but research from Financial Engines found that only 26 percent of surveyed TDF participants could actually be classified as “full-TDF users,” i.e. at least 90 percent of their investments are in TDFs.
Over a 5-year time horizon, partial-TDF users’ returns are still comparable to full-TDF users but both easily outperform non-TDF users, according to new Aon Hewitt data. TDFs are of course not without their shortcomings but regularly consulting with a professional financial advisor can help make sure that whatever strategy an investor wants to use is being implemented correctly. Encouragingly, nearly a third (31 percent) of Millennials in the BofAML survey reported that they are likely to hire a professional financial advisor within the next five years, and 42 percent said that they are open to receiving financial advice online.
Sources: NGAM, Ramsey Solutions, NAPA, Bank of America Merrill Lynch, Financial Engines, CNBC, Aon HewittPost author: Charles Couch