The cards seem to be stacked against millennials when it
comes to making the most of their finances, between inflation now being at its
highest rate in nearly 40 years, the cost of owning a home becoming
increasingly expensive and student loan debt preventing many from saving for
short- or long-term financial goals.
While millennials as a whole are making an effort to save
for the future, they are still behind previous generations when it comes to
building up their retirement savings. According to Fidelity’s 2020 Retirement
Savings Assessment study, millennials (born between 1981 and 1996) ranked
higher than Generation X-ers (born between 1965 and 1980) on the retirement
preparedness scale, in part because they had increased their savings rate from
7.5% to 9.7% over the past two years.
So why do millennials lag behind their elder cohorts when it
comes to retirement savings? Below, Select explores this question further by
speaking with Angie Chen, assistant director of savings research at the Center
for Retirement Research at Boston College.
Why don’t millennials have enough saved for retirement?
In a recent Millennials Readiness for Retirement study,
conducted in 2021 by the Center for Retirement Research, Chen and fellow
researcher Alicia Munnell found that millennials had a lower net
wealth-to-income ratio between the ages of 28 and 38 compared to that of
previous generations.
“This study I did follows a study we did earlier that showed
that they [millennials] were behind on a lot of indicators, including earnings,
labor force [participation], marital status and home ownership,” says Chen.
“Now that there’s a cohort of millennials that are in their late-20s and late-30s,
they seem to have caught up on a lot of these key metrics that we would care
about.”
Since so many millennials graduated from college during the
dot-com bubble in the early 2000s and the Great Recession in 2008, they were
thought to have worse labor market outcomes than previous generations.
Chen notes that economic downturns negatively impact new
graduates as they tend to have difficulty finding jobs or end up taking lower
paying jobs shortly after graduation — research also indicates when new graduates
enter the workforce during a recession, their earnings are lower.
The study also found that by the time most millennial men
and women are in their 30s, they have caught up to earlier generations on
metrics such as labor force participation and earnings. Millennials also have
higher college education rates than previous generations and similar home
ownership rates to Generation X-ers and baby boomers (born between 1946 and
1964).
So, if millennials are more educated, have similar rates of
home ownership as previous generations and their earning potential overall
hasn’t been hindered by two economic downturns, why are they still behind on
saving for retirement?
It turns out student loan debt was the primary reason why
many millennials were behind in building up sustainable wealth. According to
the study, 40% of millennial households between the ages of 28 and 38 had
student loan debt that amounted to more than 40% of their income.
Millennials may have taken on student loans, but they’re
also more likely to be college educated, so that generally puts them on a
higher lifetime earnings trajectory, explains Chen.
“It’s not surprising to see early on in their careers that
they would have lower net worth and potentially sort of less wealth and
retirement savings,” says Chen. “What we don’t know is whether that will
continue.”
According to Chen, this could become a major issue since
millennials also have a longer life expectancy than their elder cohorts and may
end up receiving fewer Social Security benefits in the future. The 2021 Social
Security Trustees report warns about reduced benefits beginning in 2034,
stating that retirees will only receive 78% of their benefits after that time
unless Congress resolves the long-term funding issue.
What can millennials do to get ahead on retirement
savings?
Though some personal finance experts like to attribute
millennials’ lack of retirement readiness to their wild spending habits — you
know, splurging on lattes and avocado toast — there are a number of systemic
factors that, in reality, impede their ability to save money for the long term.
A National Institute on Retirement Security survey points to
a shift from defined benefits plans, such as pensions, to defined contribution
plans, such as 401(k)s and individual retirement accounts, as one of the main
reasons why millennials are falling behind when it comes to saving for
retirement.
The 2014 survey found that only 55% of millennials were
eligible to participate in a retirement plan through their employers while 77%
of Generation X-ers and 80% of baby boomers were eligible for
employer-sponsored retirement plans.
Now that most companies are not providing pension plans to
their employees, the responsibility for saving for retirement falls on the individuals
— some experts recommend that you aim to save 15% of your income for this exact
reason.
Fortunately, when you contribute to your retirement account
you’re able to use that money to invest into the market, and thanks to compound
interest your money can grow significantly over time. For example, if you
started investing into a retirement account at age 30 and you’re investments
yielded a 9% average yearly return (the S&P 500 has yielded about 10.5% on
average since 1957) you’d need to invest just $370 per month to reach $1
million by age 65.
If your employer offers a 401(k) match, your first priority
should be to take advantage of it, as you’re essentially getting an initial
100% rate of return on your retirement contributions. Beyond your 401(k), you
might also want to consider opening an individual retirement account if
possible, preferably a traditional or Roth IRA, which both have unique
tax-advantages.
With a traditional IRA, individuals don’t have to pay taxes
until they take distributions in retirement. Depending on your income and
whether you’re offered a retirement plan through an employer, your traditional
IRA contributions may be considered tax deductible, meaning they can reduce
your taxable income which, in turn, can reduce the amount of money you’ll owe
in taxes.
A Roth IRA, on the other hand, is an after-tax retirement
account, so individuals have to pay taxes on their upfront contributions,
allowing their money to grow tax-free over time. Plus, you won’t have to pay
any taxes when you withdraw, unlike a traditional IRA. While a traditional IRA
has no income limit, a Roth IRA is only available to single people making under
$144,000 or married couples filing jointly making less than $214,000.
Click here for the
original article.