To read the headlines, it might be tempting to think that all millennials will be in big financial trouble when it comes to retirement.
For many that may eventually prove true. But there are also a growing percentage of millennial workers giving early thought to their golden years, investing in 401(k) plans at maximum ability, and even seeking out financial planning advice.
To be fair, that financial advice may come in the form of a “robo advisor.” Still, they are getting more investment and financial advice at an earlier age than their parents did. As a result, many millennials already look much better on paper than Generation Xers do when it comes to retirement savings.
“There are some encouraging signs that millennials are saving at an appropriate rate,” said Ed Farrington, executive vice president, Retirement and Business Development at Natixis, which recently published the results of its Global Retirement Security Index.
Natixis surveyed approximately 1,000 individuals for its recent study, including pre-retirees, Gen-Xers, and millennials. As part of the survey, individuals were asked the open-ended question, “How much do you think you’ll need when you retire to live comfortably?”
Looking at the responses of millennials, “They have a self-stated goal on average of about $822,000. They have already on average saved $91,000 toward that goal,” Farrington said.
The gap between $91,000 and $822,000 is certainly large. But Farrington stresses that millennials have plenty of years ahead to close it, and the fact that many have started is very encouraging.
“They are 11 percent of the way there, and they still have anywhere from 30 to 40 years left of savings. So – it’s a pretty good start,” Farrington said. “This generation does seem to be more aware and engaged. I would put them well ahead of where their Gen-X counterparts are today.”
What’s Up With Millennials and Finances?
The Natixis findings might seem to contradict some other recent research. One study pointed out that many millennials jump from job to job in an effort to further their careers, but in the process lose out in investments into their 401(k) plan.
Another recent study concluded that financial savvy is eroding among many college age and young working professionals. Among the findings: College students in 2015 are likely to have multiple credit cards and carry larger credit card balances then two years ago (when the study was last conducted). They are less likely to pay their bills on time or follow a budget. And they are less likely to review their billing accounts or credit history.
So what is going on here?
“I think it’s pretty standard that someone just starting their career has so many other things on their plate that they give retirement planning short service,” said Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh. “It’s one of the last items on their list of the things they want to spend money on. Which is a real shame. The young are the ones that can take full advantage that they have a long time until retirement.”
The other key factor was touched on by Farrington: financial advice.
“If you delve into the behaviors we see when we split the responses between those who are advised and those who are not advised, there is a real lesson in there for millennials,” Farrington said. “Millennials that said they have a financial relationship with an advisor are saving at a higher rate—9.5 percent versus 7.8 percent—and are also more likely to have a retirement goal and a plan to march toward that goal.”
Avoiding the Savings Sins of Their Fathers
The good news overall is certainly that millennials are thinking about retirement. Perhaps they have heard plenty of horror stories about their parents’ poor retirement preparedness and they don’t want the same fate. Or maybe they are convinced that Social Security benefits will not be there for them and they need to act sooner rather than later.
“I think this generation is far more use to the idea of having access to a workforce savings plan,” Farrington said. “I think they ask questions about it. I think they’re also showing broadly that they get this idea that a vast majority of their retirement will be predicated on their own savings behavior. They’re less likely to have complete faith in the Social Security system. All of those things are coming into play.”
Don’t underestimate the role of technology, either.
“If they have access to a [savings or investment] plan, they typically will have some basic education and then they have access to a suite of online tools,” Farrington said. “The vast majority of people that responded to our survey will tell you that they had access to tools such as retirement income calculators, personal performance benchmarks, and they’re able to begin down this path at an earlier age.”
The challenge for retirement planners is to convince millennials that aren’t already saving for retirement, to start doing so, and to make it an automatic process.
“When I get in front of a millennial I try to impress on them as much as I can how easy it is if they start with even a modest amount and get used to doing it,” Sollinger said. “Once it becomes a habit they don’t even think about it.”
“I would try to impress on them how simple it is and how easy it is to accumulate wealth by starting small,” Sollinger said. “You liken it to something they buy every day, like a Starbuck’s coffee or a dinner out. Couch it in terms like that. Try to make them understand how simple it is [to save] if they start now as opposed to waiting 10 years. You can say, ‘look you can have $700,000 by the time you turn 60 just by saving $50 per month.”
Finally, retirement planners should impress upon young clients that the future is a complete unknown. Both Farrington and Solinger stress that many people are forced to retire early due to health or other issues, and aren’t able to save for as long as they expected.
Farrington’s advice to his young clients: “Recognize what are likely to be significant financial events in your life and do as much as you can to plan for them, so that those events don’t derail your retirement savings. So if you’re early 20s, perhaps you have marriage and homes and children ahead of you. Begin accounting for that as soon as you can so that your behavior in terms of saving for a much longer term goal doesn’t suffer.”