What Millennials are Getting Right About Retirement
I was born between 1980 and 2000. This simple fact, over which I had no control, means that I am a millennial — a term that seems to become more loaded with each passing day.
Depending on whom you ask, millennials are lazy, highly educated, entitled, outwardly focused, technologically savvy, impersonal, cheap, indebted. We also have sophisticated palates and an aversion to risk. We're afraid to commit, apolitical, and unmoored to institutions. And we love craft everything.
Ascribing an ever-expanding series of contradictory descriptors, however, has the effect of making millennials seem alien. Yet the truth is, young professionals today are simply rational actors navigating significant financial hurdles while balancing short and long-term goals.
Take retirement. I'm about 36 years from turning 65, which means I have a number of competing interests. I know that every dollar I put away in my 401(k) will help me replace my income when I no longer work (especially if it's matched by my employer). But each dollar saved is a dollar not spent on child care or rent or paying down student loan debt. My wife and I are conscientious about our finances, but our income can be stretched so far.
Other millennials are struggling with these choices too. But all things considered, we're actually doing quite nicely — contrary to the prevailing narrative.
T. Rowe Price recently released its exhaustive Retirement Saving & Spending Study and found millennials are socking away 6% of their annual salary, while boomers saved 8%. Meanwhile four-in-ten millennials are saving a higher percentage of their income in their 401(k) compared to a year ago, compared to 21% of boomers. Moreover three-quarters of millennials track their expenses carefully and 67% say they stick to a budget, both higher than boomers.
Young savers are also more open to nudging than their older colleagues, a sign of our humility when it comes to financing retirement.
Almost half of millennials who were auto-enrolled into a 401(k) plan wished their bosses had penciled them in at a higher rate. (The prevailing introductory savings percentage is 3%.) Only about a third of boomers wished the same. More than a quarter of millennials said they wouldn't opt out if the auto-enrollment level was set at 10% or greater.
What kind of investments are millennials being enrolled into? According to Vanguard's How America Saves report, which looks at the savings habits of almost 4 million participants, eight-in-ten new retirement plan entrants were solely invested in a professionally managed allocation. That means they put their money in a professionally managed target date fund, a balanced fund, or a managed account advisory service that customizes investor portfolios.
And while auto-enrollment may put new workers at a measly 3% contribution, 70% of millennials increase contributions annually. Moreover almost 40% of plans default to 4% or more compared to 28% in 2010.
Of course, there is room for improvement.
Starting early is a necessary element of achieving your retirement goals, but not sufficient. If you save 6% of your income, according to Vanguard, you'll take have about $275,000 by the time you hit 65 (assuming a 4% real rate of return and an annual salary growth rate of 1%.) Putting away 10% will net you almost $460,000. So millennials could stand to save more.
Millennials would also do well to have a firmer grasp of what it is they're actually investing in. For instance, almost 70% of millennials who use target-date funds agreed with the statement, "Target date funds are usually less risky than balanced funds." This isn't really accurate.
How risky a target date fund is depends largely on what "target date" you choose. For instance the Vanguard Target Retirement 2050 Fund — designed for younger workers who won't retire until around the year 2050 — consists of about 90% equities. A traditional balanced fund, on the other hand, generally holds about 60% to 70% in stocks.
Millennials also don't appreciate the diversification offered by a target date fund. Because each target date fund invests in a wide array of stocks, bonds, and other assets, these vehicles are designed to be a one-fund solution. Yet almost 80% of those same millennials agreed with the statement "It's better to hold additional funds in your 401(k) than just a target date fund."
Then there are those millennials who aren't saving at all.
While it's easy to say they lack prudence and acquiesce to the immediate pleasure of money, it's more accurate to note that they probably cannot afford to save. The median personal income of non-savers is $28,000, almost $30,000 less than savers. Non-savers are not only more likely to have student loan debt, but their balances are higher.
My wife and I don't save nearly enough for retirement, but then again, we don't save enough period. Raising a small child in Brooklyn doesn't help, neither does our chosen professions in the notoriously high-paying education and journalism sectors.
But we do what we can and when other expenses fall off (like when our son starts school) or we enjoy a nice raise we'll direct that cash flow into our retirement and emergency funds. Millennials, after all, are practical.