Why the Next Generation Absolutely Must Double Its Savings Rate

You don’t have to try real hard to convince baby boomers that they are an exceptional generation. The list is familiar: fought for civil rights, liberated women, won the cold war, made tolerance and inclusion cool, dressed down on Fridays, yada yada.

But this famously debt-loving, impulse-buying, screw-retirement, consumption-driven cohort likely would laugh, along with everyone else, at the suggestion its financial savvy is a model for others to follow. Yet even where money is concerned, the Me Generation is setting the pace.

As boomers enter retirement, they are bringing with them greater wealth than their parents (other than pensions) and far more household assets than younger generations are on track to acquire. That's according to new research from J.P. Morgan Asset Management, which finds that boomer “financial exceptionalism” will have a huge impact on the economy and markets for years to come.

This may seem counterintuitive, given all the data suggesting that boomers are headed for a retirement disaster. Take that $41 trillion generational inheritance they were in line to acquire. Reality happened, and it now seems boomers will be lucky to get even a quarter of that sum. Meanwhile, only 64% of workers have saved for retirement, according to the Employee Benefit Research Institute. So where’s all this wealth coming from?

Clearly, some boomers are doing a lot better than others. The median worker with an income over $100,000 has saved about $100,000, according to the U.S. Census Bureau. But the average savings for this group is $360,000, which means that some higher-income workers are saving a lot. This may help account for the aggregate wealth that J.P. Morgan finds across the generation.

Much of this wealth is in real estate, the report finds. Residential properties boomed for decades before the recent housing bust and now account for two-thirds of boomers’ median household assets. Boomers also benefited from a long period of economic growth and stability during their peak earning years. As the labor force participation rate surged to 66.5% from 59.2% between 1965 and 1990, productivity, investments and income rose. Boomers have quadrupled their aggregate net worth since the 1980s, the report finds.

By contrast, younger generations aren't faring nearly as well. Economic growth has all but stalled and investment returns, which have been down, are expected to remain low for many years. With tepid growth typically comes low inflation, low interest rates, low investment gains and modest income increases. Adjusted for inflation, today’s younger Gen Xers, 35- to 44-year-olds, have a paltry median net worth of $47,000, compared with $102,000 for those of a similar age 25 years ago.

Adding to the headwinds that Gen X and millennials face, many boomers intend to remain on the job as long as possible, leaving less room for advancement. They will also slowly sell their assets, including housing, to maintain their lifestyle. This may slow growth in the housing and stock markets for years and possibly deny younger generations a key source of boomer wealth.

The upshot, says J.P. Morgan, is that Gen X must double its savings rate to a steep 17.5%—yes, 17.5%—in order to enter retirement in as good a financial position as boomers. The story is probably brighter for millennials, who have more time and greater numbers and could yet see a long period of growth. But they too need to step up their savings game.

If raising your savings rate that high is too difficult right now, take smaller steps to start. Try ratcheting up your 401(k) contribution level by just 1% to start, then increase it as you get raises or at regular intervals, perhaps on your birthday. (This calculator will show you how much your increased contributions will boost your savings.) You may also have an auto-escalation option at your retirement plan, which would make the process seamless. As research by Aon Hewitt found, some 70% of workers using auto-escalation in their 401(k)s were on track to a comfortable retirement, or close to it.

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