Why Millennials Need to Save Twice as Much as Boomers Did

Don’t be fooled by the stock market’s recent gains—or even its long impressive recovery from the financial crisis. We have been in a low-return environment since the Internet bubble popped at the turn of the century, and there is little reason to believe that will change anytime soon.

Retirement savers cannot count on the markets to do the heavy lifting for them. They must save more—a lot more, according to a report from BlackRock, an asset manager. The old rule was saving 10% to 15% of pay. But Millennials will need to save 25% of pay for 40 years to get the same result that was available to boomers saving half that much, BlackRock concludes.

“Our hope is that people take action now to get the benefit of compounding over time,” says Anne Ackerley, head of BlackRock’s U.S. and Canada defined contribution group. The BlackRock estimate echoes an analysis from Nerdwallet that found Millennials must save 22% of pay to afford a comfortable retirement.

These are big numbers. Young workers currently save about 6% of pay. Taking that up to 22% to 25%, including an employer match, is probably out of the question in the near future. Young people tend to have outsized housing costs and many student loans.

That’s okay, Ackerley says. The 25% isn’t set in stone; it’s just a math result that came from looking at past results and estimating future returns. These lofty required savings rates also spring from an assumption that there will be no Social Security, which probably is not the case. Still, the point is a good one: boomers lived through an unusually robust period for market gains that likely will not recur during Millennials’ saving years. Young adults need to save twice as much to get a similar result.

If you have a short memory you may wonder what the heck Blackrock is taking about. The Standard & Poor’s 500 is up 6% since the election and has more than tripled from the financial crisis low. But since the end of a long bull market in 2000 the S&P 500 including dividends is up just an average annual 4.3%, or 2.2% after inflation. BlackRock foresees those kinds of average returns as far as the eye can see.

Why? The working-age population is slowing in the developed world, which leads to less demand for things, BlackRock found. Economies around the world are slowing, which weighs on corporate profits. And technology is disrupting established industries, slowing expenditures on equipment, labor, real estate and tangible assets.

Since 1978, when boomers first started investing in 401(k) plans, a mix of 60% stocks and 40% bonds has risen 6.3% a year—a favorable period that allowed boomers who bothered to start saving (many did not) a golden opportunity to prepare for retirement. The 90-year average annual return has been just 5.1%, pointing up the favorable environment boomers enjoyed.

Here’s what young adults are up against: BlackRock estimates average annual portfolio growth of just 2.9% going forward. Inflation will also be lower, but not nearly low enough to offset the difficulty of building a nest egg in such an environment. One percentage point of additional returns each year would translate into 25% more total savings over 40 years for a typical Millennial, the firm found. A nest egg would be 58% larger at age 65 with an additional 2 percentage points of yearly return.

The projections underscore the need for young people to start saving early, take some risk with stocks, and escalate contributions every year until they are saving at least 15% of pay. Planning to work longer is also a good idea but isn’t always possible.

The findings also put pressure on plan administrators to make saving simpler to understand and more difficult for workers to avoid. Among plan changes BlackRock suggests: higher default rates for employee contributions, requiring employees to contribute more to get the full match, auto enrolling older workers in “catch-up” programs that allow them to save more tax deferred, and making loans and early withdrawals more difficult.