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Retirement Planning > Saving for Retirement

Despite Wealth Gains, Millennials Likely to Face Greater Retirement Uncertainty

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What You Need to Know

  • For early millennials in the top fifth of the lifetime earnings distribution, median age-70 income will be 51% higher than pre-boomers.
  • However, because of earnings inequality, 38% of millennials born in the 1980s will have inadequate age-70 income, compared with 28% of pre-boomers.
  • Many millennials will desperately need the help of financial advisors as they seek to convert accumulated, tax-advantaged assets into sustainable income streams.

Richard Johnson is a senior fellow in the Income and Benefits Policy Center at the Urban Institute, where he directs the organization’s program on retirement policy.

An expert on financial security at older ages, he has authored or co-authored more than 200 journal articles, book chapters, research reports and policy briefs. His latest project, written in collaboration with the Urban Institute’s Karen Smith, seeks to answer a straightforward but significant question: How might millennials fare in retirement?

In a word, Johnson says, the financial outlook for future generations of retirees is uncertain. To begin with, the scheduled increase in Social Security’s full retirement age to 67 will reduce benefits for future retirees, and the program’s longstanding financing gap could lead to further cuts.

Other ominous signs, Johnson says, include the erosion of traditional defined benefit pensions, stagnating earnings among lower- and moderate-income men, growing indebtedness and rising out-of-pocket costs for medical care and long-term services.

On the other hand, the Urban Institute’s analysis identifies trends that are more promising, such as the increase in women’s earnings and the growth in employment at older ages.

As Johnson tells ThinkAdvisor, given their relatively long time horizon ahead of retirement, millennials have a tremendous opportunity to improve their outlook, for example by committing to higher levels of saving and making smart choices about investing, ideally in collaboration with a skilled financial advisor.

A Wealthier Generation Overall

Johnson says the analysis projects per capita family income at age 70 to increase over time, such that average age-70 income is projected to reach $80,300 for early millennials in 2021 inflation-adjusted dollars. This figure is 35% higher than the $59,400 average for pre-boomers born between 1937 and 1945 and 23% higher than the $65,400 for late boomers, defined here as those born between 1955 and 1964.

Projected age-70 incomes are higher for men, non-Hispanic white adults, married adults and college graduates than they are for women, people of color, single adults and people who did not attend college. The analysis further projects that many of these differentials will narrow over the coming decades as projected retirement incomes grow rapidly for people of color and women.

Johnson agrees that these figures should be of interest to financial advisor professionals, as the projection of significantly increased retirement wealth at the population level clearly indicates the millennial generation will include a substantial number of potential high-net-worth clients. What’s more, Johnson says, much of this wealth will be held in the employer-sponsored retirement plan system, and more specifically in defined contribution style plans as opposed to pensions.

As such, Johnson says, many millennials will desperately need the help of financial advisors as they seek to convert accumulated, tax-advantaged assets into sustainable income streams for a potentially lengthy retirement.

Concerns Over Inequality

According to the Urban Institute, projected age-70 income differentials by lifetime earnings will increase over time, which Johnson calls “troubling.” Specifically, for people in the top fifth of the lifetime earnings distribution, median age-70 income will be 51% higher among early millennials than among pre-boomers.

Median age-70 income will increase only 22%, however, for people in the middle fifth of the lifetime earnings distribution and only 31% for people in the bottom fifth, the analysis projects.

These differentials largely reflect ongoing growth in earnings inequality, Johnson explains, as earnings have increased more rapidly near the top of the earnings distribution than in the middle or near the bottom.

“The current and projected levels of inequality are pretty staggering,” Johnson says. “It’s one of the big challenges we face, in general, as a society, and so it is no surprise to see these results in our analysis.”

Will It be Enough?

The analysis classifies age-70 income as inadequate if it falls below 25% of the annual national average wage or replaces less than 75% of annual preretirement earnings, a commonly assumed minimum amount needed to maintain preretirement living standards.

“However, we classify income that equals or exceeds 100% of the annual national average wage as adequate, regardless of the replacement rate,” Johnson notes.

Because the share of preretirement earnings needed to ensure that retirees can maintain their preretirement living standards is uncertain, the analysis also considers two alternative replacement rate thresholds of 60% and 90%.

After crunching the numbers, which are presented in great detail in the report, Johnson’s analysis projects that 38% of early millennials born in the 1980s will have inadequate age-70 income, compared with 28% of pre-boomers and 30% of late boomers.

So, while millennials will likely be the wealthiest generation of retirees from an asset-based standpoint, they will likely actually face greater retirement uncertainty than previous generations. In other words, the share of older adults with inadequate income increases over time, Johnson explains, principally because retirement incomes are expected to grow more slowly than labor market earnings.

Takeaways for Today’s Financial Advisors

Reflecting on the data from the perspective of financial advisory professionals, Johnson says there is a lot to digest, but it is clear that the millennial generation will require the support of the wealth management and advisory industry to achieve its full potential. While they may not make ideal clients today, many millennials are well on their way to creating significant wealth within employer-sponsored retirement plans and in other places not traditionally touched by financial advisors, for example in discounted self-service brokerage accounts.

And it won’t necessarily take decades for the millennial population to become a central focal point for today’s wealth advisors. Johnson notes that many millennials will be the recipients of significant wealth transfers in the coming years, and they will need the services of financial advisors to ensure they make positive money decisions.

On the one hand, financial advisors can help ensure millennials with substantial but more limited resources build a sustainable income plan that addresses both longevity and market risk, at least to the greatest degree possible. Keys to achieving such outcomes, Johnson says, will be efficient Social Security and Medicare claiming and smart choices about how much market risk to take and how much guaranteed income to purchase.

Alternatively, many wealthy individuals actually end up underspending in retirement and fail to enjoy the wealth they have accumulated to its full potential. Johnson says this outcome, while less dire on its face, is also obviously undesirable at the population level.

“Financial advisory professionals have a key role to play in helping to ensure the millennial generation achieves positive retirement outcomes,” Johnson says. “People at all wealth levels, as they approach and enter retirement, need more advice than ever before. What are they going to do with their substantial retirement plan balances? How are they going to make optimal Social Security decisions and Medicare decisions?

“Employers, at least at this stage, are not doing a very good job of educating workers about what to do as they retire, which presents a clear opportunity for financial advisors to step in.”


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