Retirement facts Millennials need to know

The outlook for Millennials' retirement looks quite different from older generations' plans. These are the facts Millennials should know about retirement, and how to use those facts to plan accordingly for the future. 

Daniel Lin/Daily News-Record/AP/File
James Madison University graduating seniors sit during the school's 2015 commencement ceremonies in Harrisonburg, Va. To strategically plan for retirement, Millennials need to know about managing student debt and being financially literate.

Millennials never seem to get a break.

  • 14 percent of 25 to 34-year-olds are still living at home with their parents.
  • In 2013, the median annual income was $30,000 and $35,000 for full-time Millennial women and Millennial men, respectively.
  • Just 36 percent of Americans under the age of 35 own a home, according to the Census Bureau.

Don't kill the messenger, but the retirement outlook for Millennials is looking a bit tougher than earlier generations'. There are clear signs that what our retirement looks like and how we save for it is much different from our grandparents' (or even parents') experience. Here are five warning signs that Millennials need to take note of.

1. High Student Loan Debt

Back in 2012, college seniors graduated with an average debt of $29,400 per borrower. That number is almost $4,000 higher for the Class of 2014. In 2014, a college graduate owes an average of $33,000 in student loans.

To put those statistics in perspective: Only 45 percent of Class of 1993 graduates had debt, and their average debt was $15,000 in inflation-adjusted dollars.

More and more Millennials are borrowing to pay for college. In 2000, 60 percent of graduating students had schools loans. Last year, that percentage grew to over 70 percent. The problem with high student loan balances is that they effectively diminish your potential to save for retirement.

Let's assume that you graduate with a standard 10-year loan and pay $2,400 for each of those 10 years. If you were to have invested those dollars in an index fund with a 5 percent return compounded annually, you would have ended with $30,998.14 available in your nest egg at the end of 10 years.

Remember that your twenties and thirties are your most important years for retirement saving because those years offer the longest timeframe to earn compounded returns. Keep those student loan balances in check.

2. Low Financial Literacy

Only 24 percent of Millennials are able to answer correctly four or five questions on a five-question financial literacy quiz. On the other hand, 48 percent of Baby Boomers and 55 percent of members of the Silent Generation are able to do that.

While more Millennials are attending college, they are less financially literate than older generations. This low level of financial literacy makes Millennials ill-prepared to make critical financial decisions:

  • Only 7 percent of employers offer traditional pensions plans. Forced to rely more on 401(k) plans to save for retirement, Millennials need to make many decisions, such as what funds to invest in and how much to contribute.
  • 43 percent of Millennials use expensive forms of borrowing, such as pawnshops and payday lenders. Only 21 percent of Boomers and 8 percent of the Silent Generation use those lending options.
  • According to a 2012 National Financial Capability Study, 34 percent of Millennials engage in three or more costly credit card behaviors over a 12-month period. In contrast, only 24 percent of Boomers and 13 percent of the Silent Generation engage in such behaviors.

Grandpa is taking you to (finance) school. Take action: Set up a meeting with a certified financial planner to develop a retirement plan, and talk with your employer about your company's retirement accounts.

3. Low Savings Level

Only 61 percent of Millennials label themselves "savers," according to a 2013 Wells Fargo survey.

When you're not saving for retirement, you're getting further and further away from your nest egg's goal. A common rule of thumb from financial advisors is that you should have a $1 million target for retirement.

Consider these two scenarios:

  • If you were to start putting away $361 every month at age 20 in an index fund with a 6 percent return, you would be about $100 short of $1 million by retirement age 65.
  • If you were to start 20 years later at age 40 and still would like to retire by age 65 with a $1 million nest egg, you would need to put away $1,430 per month on that same retirement account.

However, grandpa's rule of thumb of $1 million may no longer be enough. More and more registered investment advisors recommend Millennials to set a $2 million retirement goal. The main reason is that Americans are living longer.

The Social Security Administration projects that about 10 percent of 65-year-olds will even live beyond 95. Life expectancy is likely to be even higher for Millennials once they reach age 65. Assuming a 4 percent annual withdrawal rate, a $1 million nest egg would run out in 25 years.

So, start maximizing your contributions to your 401(k) and take advantage of your employer's matching program, if available. In 2015, the IRS allows you to put away up to $18,000 for retirement. Once you turn age 50, you can start making catch-up contributions to get closer to your retirement goal.

4. Lower Starting Salary

More than 60 percent of Millennials don't negotiate salary when receiving their first job offers.

Every single generation has heard that "this is the worst possible year to graduate." At least I did when I got my Bachelor of Commerce back in 2002, then again when I received my Masters in Educational Technology in 2007, and yet again when I completed my MBA in 2009. (Disclaimer: I graduated debt free all three times!)

Don't think that negotiating your first salary puts you at a disadvantage with other applicants:

  • 80 percent of students and grads who negotiate a higher salary are at least partially successful.
  • 90 percent of employers have never retraced an offer because entry-level applicant tried to negotiate salary.
  • Only 34 percent of female grads negotiate salaries, while 44 percent of male ones do. However, both genders have the same 80 percent rate of success.
  • 75 percent of employers could raise a starting salary by 5 percent to 10 percent.

Don't leave money on the table when negotiating salary for your first job. You'll regret it just a few years later and again during retirement.

5. Missing Out on Company Matches

Millennials are getting hit with a double whammy.

  • 42 percent of workers earning less than $40,000 per year don't take full advantage of their employer match.
  • 35 percent of workers age 25 and 30 percent of workers age 30 don't maximize their employer match.

The average US worker foregoes $1,336 per year or an extra 2.4 percent in retirement savings. This means, that about $24 billion in matching contributions are left on the table every year. The combination of lower income level and younger age makes Millennials more prone to miss out on contributions to their retirement accounts.

No matter your employer's match level, it's free retirement money. If you find it difficult to meet the 10 percent –15 percent suggested contribution to your retirement account, then contribute enough so that your employer match fills the gap.

The Bottom Line

Meeting your retirement goal may feel overwhelming at times. These statistics should be a well-needed wake up call to realize that saving for retirement is not like it used to be. They're just a diagnostic — not a prognostic.

Still, Millennials should be happy that we have more time to save for retirement than older generations. Let's take advantage of this edge and take corrective steps now.

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