Do you find the idea of working beyond retirement age unappealing? If so, it's important to have a solid retirement savings plan and execute it early to take advantage of the effects of compounding interest.
Unfortunately, too many Americans are not saving enough for retirement, including Millennials (ages 17-35) who are currently in the early critical years of income and retirement savings. A Wells Fargo study, "Seeing Wealth Differently Across Generations," notes that 41% of Millennials have not started saving for retirement at all thereby missing out on the opportunity to build significant savings with even minimal contributions.
As you might expect, the study found that higher percentages of older generations are investing for retirement. Approximately 73% of both Baby Boomers (ages 53-71) and Generation X (ages 36-52) reported investing in retirement accounts but both generations are still concerned about their efforts. Of the current workforce, half expect to put off retirement until age seventy due to a lack of sufficient retirement funds.
Generation X, having been hit hard by the Great Recession, shows a general pessimism about having a secure retirement. This is understandable, since the Pew Charitable Trusts calculated that the Great Recession cost Generation X almost half of its total wealth between 2007 and 2010.
The Great Recession also treated Millennials harshly. Many were unable to embark on their careers at all while others were forced to settle for jobs below their training and pay expectations. As a result, Millennials are not just earning lower entry-level salaries; they are also earning 20% less than Baby Boomers earned during the same stage in their lives.
Millennials who are not yet saving for retirement cited this pay discrepancy as a reason for delaying retirement savings. Within that group, 64% say they simply don't make enough money to be able to save for retirement.
Debt levels are likely a contributing factor. The study reported that three-quarters of Millennials who reported carrying debt consider their debt to be unmanageable. Just over one-third of all Millennials have student debt, with a median student loan balance near $20,000. Find out quickly at what rate you can refinance your student loan. It's difficult to simultaneously pay monthly bills, chip away at debt, and save for retirement all at the same time, especially with reduced effective incomes yet it's very important that Millennials gain the sound fiscal habits that allow them to balance all these income drains.
Wells Fargo found that Millennials do show relatively conservative fiscal habits, including an aversion to credit. After watching the effects of the Great Recession, they tend to hold a greater percentage of their investments in fixed assets (12.6% compared to 11.1% for Generation X).
To meet typical growth goals for retirement, the U.S. Target Fund for their age group (with a 2045 retirement target date) suggests holding almost 86% of their investments in equities. Millennials surveyed held just under 68% equities on average. In essence, this penalizes Millennials even further because they are starting retirement investments later in life and generally investing in lower-growth vehicles.
Millennials may just have different priorities. They are more interested in social impact investing and are more open to international investing, especially in multinational companies whose products they purchase. In addition, Millennials may look at retirement as simply an extension of their career paths. A Merrill Edge study from May shows that 63% of Millennials save to live their desired lifestyle instead of saving to leave the workforce (compared to 45% of both Generation X and Baby Boomers).
Regardless of the reasoning and the priorities, Millennials are definitely saving less for retirement. With proper budgeting, Millennials can still follow their priorities while squeezing out at least a few dollars toward retirement now, while the effect is maximized. Millennial priorities may shift over the years once retirement creeps closer, and those who carved out some retirement savings will be glad they did.
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