5 Facts Millennials Should Know About Retirement Planning

Millennials never seem to get a break.

  • 14% of 25 to 34-year-olds are still living at home with their parents.
  • In 2013, the median annual income was $30,000 and $35,000 for full-time Millennial women and Millennial men, respectively.
  • Just 36% of Americans under the age of 35 own a home, according to the Census Bureau.

Don't kill the messenger, but the retirement outlook for Millennials is looking a bit tougher than earlier generations'. There are clear signs that what our retirement looks like and how we save for it is much different from our grandparents' (or even parents') experience. Here are five warning signs that Millennials need to take note of.

1. High Student Loan Debt

Back in 2012, college seniors graduated with an average debt of $29,400 per borrower. That number is almost $4,000 higher for the Class of 2014. In 2014, a college graduate owes an average of $33,000 in student loans.

To put those statistics in perspective: Only 45% of Class of 1993 graduates had debt, and their average debt was $15,000 in inflation-adjusted dollars.

More and more Millennials are borrowing to pay for college. In 2000, 60% of graduating students had schools loans. Last year, that percentage grew to over 70%. The problem with high student loan balances is that they effectively diminish your potential to save for retirement.

Let's assume that you graduate with a standard 10-year loan and pay $2,400 for each of those 10 years. If you were to have invested those dollars in an index fund with a 5% return compounded annually, you would have ended with $30,998.14 available in your nest egg at the end of 10 years.

Remember that your twenties and thirties are your most important years for retirement saving because those years offer the longest timeframe to earn compounded returns. Keep those student loan balances in check.

2. Low Financial Literacy

Only 24% of Millennials are able to answer correctly four or five questions on a five-question financial literacy quiz. On the other hand, 48% of Baby Boomers and 55% of members of the Silent Generation are able to do that.

While more Millennials are attending college, they are less financially literate than older generations. This low level of financial literacy makes Millennials ill-prepared to make critical financial decisions:

  • Only 7% of employers offer traditional pensions plans. Forced to rely more on 401(k) plans to save for retirement, Millennials need to make many decisions, such as what funds to invest in and how much to contribute.
  • 43% of Millennials use expensive forms of borrowing, such as pawnshops and payday lenders. Only 21% of Boomers and 8% of the Silent Generation use those lending options.
  • According to a 2012 National Financial Capability Study, 34% of Millennials engage in three or more costly credit card behaviors over a 12-month period. In contrast, only 24% of Boomers and 13% of the Silent Generation engage in such behaviors.

Grandpa is taking you to (finance) school. Take action: Set up a meeting with a certified financial planner to develop a retirement plan, and talk with your employer about your company's retirement accounts.

3. Low Savings Level

Only 61% of Millennials label themselves "savers," according to a 2013 Wells Fargo survey.

When you're not saving for retirement, you're getting further and further away from your nest egg's goal. A common rule of thumb from financial advisors is that you should have a $1 million target for retirement.

Consider these two scenarios:

  • If you were to start putting away $361 every month at age 20 in an index fund with a 6% return, you would be about $100 short of $1 million by retirement age 65.
  • If you were to start 20 years later at age 40 and still would like to retire by age 65 with a $1 million nest egg, you would need to put away $1,430 per month on that same retirement account.

However, grandpa's rule of thumb of $1 million may no longer be enough. More and more registered investment advisors recommend Millennials to set a $2 million retirement goal. The main reason is that Americans are living longer.

The Social Security Administration projects that about 10% of 65-year-olds will even live beyond 95. Life expectancy is likely to be even higher for Millennials once they reach age 65. Assuming a 4% annual withdrawal rate, a $1 million nest egg would run out in 25 years.

So, start maximizing your contributions to your 401(k) and take advantage of your employer's matching program, if available. In 2015, the IRS allows you to put away up to $18,000 for retirement. Once you turn age 50, you can start making catch-up contributions to get closer to your retirement goal.

4. Lower Starting Salary

More than 60% of Millennials don't negotiate salary when receiving their first job offers.

Every single generation has heard that "this is the worst possible year to graduate." At least I did when I got my Bachelor of Commerce back in 2002, then again when I received my Masters in Educational Technology in 2007, and yet again when I completed my MBA in 2009. (Disclaimer: I graduated debt free all three times!)

Don't think that negotiating your first salary puts you at a disadvantage with other applicants:

  • 80% of students and grads who negotiate a higher salary are at least partially successful.
  • 90% of employers have never retracted an offer because entry-level applicant tried to negotiate salary.
  • Only 34% of female grads negotiate salaries, while 44% of male ones do. However, both genders have the same 80% rate of success.
  • 75% of employers could raise a starting salary by 5% to 10%.

Don't leave money on the table when negotiating salary for your first job. You'll regret it just a few years later and again during retirement.

5. Missing Out on Company Matches

Millennials are getting hit with a double whammy.

  • 42% of workers earning less than $40,000 per year don't take full advantage of their employer match.
  • 35% of workers age 25 and 30% of workers age 30 don't maximize their employer match.

The average U.S. worker foregoes $1,336 per year or an extra 2.4% in retirement savings. This means, that about $24 billion in matching contributions are left on the table every year. The combination of lower income level and younger age makes Millennials more prone to miss out on contributions to their retirement accounts.

No matter your employer's match level, it's free retirement money. If you find it difficult to meet the 10%–15% suggested contribution to your retirement account, then contribute enough so that your employer match fills the gap.

The Bottom Line

Meeting your retirement goal may feel overwhelming at times. These statistics should be a well-needed wake up call to realize that saving for retirement is not like it used to be. They're just a diagnostic — not a prognostic.

Still, Millennials should be happy that we have more time to save for retirement than older generations. Let's take advantage of this edge and take corrective steps now.

Millennials, what are you doing to save for retirement?

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Guest's picture

A great article that hopefully acts as an eyeopener for millennials. The fact that a higher percentage have student debt that is growing and the low financial literacy is a dangerous combination. Debt seems to be (and almost is with rising post-secondary education costs) unavoidable yet we learn very minimal financial education and that's why there are many successful individuals that have a hard time managing their finances.

Reaching financial freedom, where passive income exceeds expenses isn't rocket science. It's actually quite simple. We simply need to learn to earn, plan, and invest. Regardless of how much each of us make, if we can control our expenditures, and increase the amount of money we stash away even with the high amounts of debt, we can all achieve financial freedom much earlier than we might think. It's a waste because these millennials have their whole lives ahead of them and if only they planned and started investing at this early stage, they wouldn't have too much to worry about in terms of finances down the road.

Damian Davila's picture

Glad to hear that you enjoyed the article, Michael. Millennials grew up in a country and financial environment that was very much shaped by the Great Recession, and many of their behaviors and attitudes reflect this fact. I think what makes my generation quite different from others is that we have to face many more financial challenges than previous generations. The biggest ones being managing a 401(k) as the main source of retirement income and having to get a university degree to be able to get a decent salary. I believe we have strong challenges ahead of us but I also believe that we will overcome them.

Guest's picture

The key is to start saving/investing early in life and be consistent (save with every paycheck). Taking advantage of a matching 401k plan should be a no brainer. The power of compounding is lost on many people. Also maxing out contributions when possible, eliminating debt, avoiding risks with your nest egg, planning for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.) and making catch up contributions once you reach 50 should all be part of everyone's plan. And work at staying healthy to reduce illness, injuries and medical costs. I recently found the site Retirement And Good Living which provides information on all these issues as well as many other retirement topics and also has several retirement and health calculators.

Damian Davila's picture

All good points, Skysilor. Thank you for sharing them.

Guest's picture

Millennials should know about long term care too. While the overused statement "The key is to start saving and planning early in life" is true, people need to invest on something that can protect them against costly and unexpected expenses during their retirement and that includes long term care. Insurance can play a major role in helping you pay for your long term care needs. Ltc insurance, for one, provides a comprehensive coverage protecting your finances and also your assets. There are also other options available to fund your long term care, that is why it is imperative for millennials to know all of them to help them come up with a sound decision.

Damian Davila's picture

Great point Tanyam. More and more retirees are depending on relatives for care during their golden years. As baby boomers are retiring, parents of Millennials are becoming (or will become) responsible for their care. Trying to balance medication, elderly care, and full-time employment obligations is taking a toll on the retirement planning of the parents of Millennials. This is why Millennials should take note of what's happening right now and also include the potential of having to take their parents when planning for their own retirement. A long term insurance plan, as you mention, may be a way to hedge against potential high costs in the future.

Guest's picture

I think you mean 'retracted' instead of 'retraced'

Damian Davila's picture

Great catch Guest, thank you for pointing it out. We have fixed it.