Retirement: How much should Millennials save?
Prepare to have your day ruined, Millennials: “Even if you’re saving for retirement, it’s probably not enough,” said James Dennin in Mic.com. Nearly a third of Americans ages 18 to 34 report saving 10 percent of their annual income or more for retirement, but a new study from personal finance website NerdWallet.com estimates that it will probably take more than twice that for them to achieve a comfortable post-work life. A 25-year-old currently earning $40,000 a year will need to save 22 percent of his pay throughout his career to retire by age 67, according to NerdWallet’s calculations. That assumes a salary increase of 2 percent each year, and a goal of being able to replace 80 percent of one’s income in retirement. The reason for the higher contributions is that most retirement experts now expect lower average annual stock market returns in the decades to come, something like 5 percent as opposed to the 7 percent many retirement forecasts use today. All together now: “Ugh.”
“If you’re starting out and can somehow afford to save 22 percent a year and still live an acceptable lifestyle, hey, go for it,” said Walter Updegrave in Time.com. But for most young people, many of whom are already struggling with housing costs and student loan debt, 22 percent just isn’t a realistic target. Here’s the good news: NerdWallet’s study doesn’t include Social Security income, which was left out because roughly half of Millennials say they don’t expect to receive anything from Social Security when they retire. Despite the program’s “well-known funding issues,” this is overly pessimistic. The Congressional Budget Office estimates that today’s highest-income younger workers would still collect roughly 20 percent of their pre-retirement income in benefits from payroll taxes that flow into the system. In all likelihood, Millennials won’t have to fund their retirement entirely from personal savings.
“The fact is, any calculation of a retirement savings goal makes a number of assumptions about the future,” said Steve Vernon in CBSNews.com. Any prediction about the future of Social Security, your assumed retirement age, or average return on investment “is, at best, a guesstimate and more often is simply a shot in the dark.” That’s especially true for workers who won’t be retiring for decades. “Your best bet would be to pick a reasonable savings target that fits your outlook for the future.” As you get older, you can adjust as necessary. All the same, Millennials are clearly anxious about their retirement prospects, said Suzanne Woolley in Bloomberg.com. Some 60 percent of those ages 18 to 34 in a recent Willis Towers Watson survey said they’d be willing to give up some pay today “if it meant a more secure retirement.” It just goes to show that even though Millennials are often portrayed as “entitled slackers, many surveys show they are smart about money.”