Millennials Need to Save Extra if They Want to Retire Like Their Parents and Grandparents

Call it a triple whammy: Higher levels of student debt now, plus likely lower payouts from Social Security and longer expected lifespans, leave millennials with a taller order than prior generations when it comes to saving for retirement.

That’s the upshot of a new research brief from the Center for Retirement Research at Boston College, which also notes that while millennials are saving at the same rate as older generations did at their age, these headwinds mean they'll need to save even more to achieve the same wealth as Gen X and baby boomers.

It’s no secret that millennials face some systemic financial challenges. Rising higher education costs have burdened the generation with student debt at far wider levels than their parents and grandparents. And stagnant wages, particularly for those who entered the workforce during the Great Recession, have made it harder to pay down that debt.

The good news is millennials have caught up in some measures, according to the latest Center for Retirement Research analysis, which compares older millennials ages 28 to 38 with Generation X and boomers when they were the same age.

The authors found that by their 30s, millennials’ earnings and labor market participation are on par with those of earlier generations. And by their late 30s, millennials also marry and buy homes at the same rates as boomers and Generation X did. All of those are improvements from 2016, when the center previously looked at millennials’ retirement readiness.

But when it comes to wealth building, the authors say that millennials still lag far behind, largely due to student debt. Forty percent of millennial households ages 28 to 38 in the latest Federal Reserve Survey of Consumer Finances have student debt, and it’s equal to 40% of their income on average.

The result is that millennials’ net wealth-to-income ratio is well below that of previous generations at the same age. Looking at the 34- to 38-year-old bracket, millennials in 2019 had a median net wealth-to-income ratio of 70%. That’s compared to 110% for Gen Xers in 2007 and 82% for late boomers in 1992.

The goal with retirement preparedness is to be able to maintain a pre-retirement standard of living after you stop working, says Angie Chen, the assistant director of savings research at the Center for Retirement Research at Boston College. But if millennials have less wealth-to-income, then their wealth will produce less income to live off of in retirement.

Millennials’ lackluster retirement preparation isn’t from a lack of trying. Multiple previous reports have found that millennials actually save at the same rate as previous generations did at their age. Fidelity, for example, found millennials increased their median savings rate from 7.5% in 2018 to 9.7% in 2020, which helped give the generation a slightly better retirement preparation score than Gen X.

The Boston College report is based on 2019 finances, so it doesn’t account for the financial effects of the pandemic, which have likely set some savers back even further. An October report from the Transamerica Center for Retirement Studies found that 43% of millennials had already withdrawn or were considering withdrawing from their retirement accounts during the financial upheaval of 2020. That’s compared to 27% of Generation X and 11% of baby boomers.

While experts stress that Social Security will be around for millennials, there is a good chance that younger Americans could get less from the system than current and previous retirees. One way is through an increase in Social Security’s full retirement age. What's more, unless Congress makes changes, it's also likely that the system’s long-term financing problems will lead to reductions in the size of benefit payments, according to an annual report from the Social Security Board of Trustees.

Here are some tips for millennials to begin to close the wealth gap:

Harness Your Youth: Millennials may no longer be the youngest adult generation (hey, Gen Z!), but they are still relatively young. That means they have decades, including their prime earning years, to play catch up on retirement savings, says Tricia Kollath, a certified financial planner in Ocean Springs, Miss. The younger you are, the more of your retirement assets that should be invested in stocks, experts say, because even if there's a market downturn, you have time to recoup your losses. Try investing in a target-date fund, which will slowly shift your assets from stocks into safer investments as you get older.

Get the Company Match: There’s a reason why this advice is always a part of retirement savings guidelines. If you’re lucky enough to work at a company with a 401(k) match, that is free money. It can be hard to contribute enough to get the full match, especially when you’re paying down significant student debt. But think of it this way: you're usually contributing pre-tax dollars, which means for every $1,000 you put into a retirement account, your take home pay only falls by about $850, assuming a 15% effective tax rate.

Don't Obsess Over Your Student Debt: But don't ignore it, either. Federal student debt, in particular, is flexible debt, in the sense that you have choices in how you repay it. Kollath says once her clients make a manageable plan for their student debt, they're better able to focus on their other financial goals. That's especially true for those with large debt burdens, who can take advantage of the government's income-driven or extended repayment plans to potentially free up cash in their budget for savings.

Tackle Your Goals in Order: The other benefit of millennials' relative youth is that they have to time to tackle goals somewhat chronologically. Many of the clients Kollath works with, for example, want to save for a down payment for their first home. While they don't ignore their debt or retirement, they do save a smaller amount for retirement — say, 6% to get your full company match — and then direct all their savings attention to the down payment. Once they cross that goal off their list, they can shift all of that energy (and money) to their retirement funds, Kollath says. During your 30s, if you can build up to saving 15% to 20% of your income for retirement, you're in great shape, she says.

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