Millennials Underestimate Retirement Savings Needs
A new survey from the Transamerica Center for Retirement Studies revealed that while most Millennials are saving for retirement, they grossly underestimate how much they’ll need to retire comfortably. Millennials, like most workers, aren’t educated about how much they should amass before retirement age. 44 percent of workers reported that their retirement savings estimates were mere guesses.
What Are Millennials’ Retirement Savings Estimates?
Millennials estimate that they’ll need a median of $300,000 to retire comfortably, while Gen Xers and Baby Boomers estimate needing $500,000. They’re also more likely to procrastinate than other generations when it comes to setting aside money for retirement. More than half (51 percent) agreed with the statement “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.”
The pandemic highlights the need for a backup plan if forced into early retirement, but most workers don’t have such a plan in place. Only 34 percent of Millennials have a financial strategy should they need to retire early.
Though Millennials underestimate their retirement savings needs, most are exhibiting conscientious savings behavior. 72 percent are already making regular contributions to a 401(k) and/or saving outside of work. And the median age that Millennials begin saving for retirement is lower than other generations. For Millennials, the median age for initiating retirement savings is 24. For Gen Xers and Baby Boomers, it’s age 30 and age 35, respectively.
Some Millennials are particularly prepared for retirement; almost one in four already have a $100,000 nest egg. And most Millennials (73 percent) said they prefer to live frugally in order to achieve future financial security.
How Much Do Millennials Need to Retire Comfortably?
Financial experts recommend saving 70 percent of your pre-retirement salary per year of retirement. The amount that an individual will need varies based on expected lifestyle, retirement age, and location. For example, while $1 million would be enough to comfortably retire for 25 years in Columbus, it would only get you through 10 years of retirement in Manhattan.
The age that Millennials start saving also impacts how much they should put away each year. According to recommendations from Fidelity Investments, here’s how much Millennials should have saved by age:
|30||1X starting salary|
|35||2X starting salary|
|40||3X starting salary|
|45||4X starting salary|
|50||6X starting salary|
|55||7X starting salary|
|60||8X starting salary|
|67||10X starting salary|
If you’re behind on your savings, you may need to contribute a greater percentage of your salary to a retirement account, find a way to earn extra income, or work part time into retirement.
How to Save for Retirement
To retire comfortably, Fidelity recommends setting aside 15 percent of your pre-tax income each year for retirement, including employer contributions. The median amount that workers are putting away each year is 10 percent, according to the Transamerica study.
Experts recommend keeping the money in a 401(k) or other tax-advantaged investment account rather than a savings account, since your money will accrue more interest this way. Automated contributions are a great way to hold yourself accountable.
To be able to save 15 percent of your income, you’ll need a budget. Subtract your monthly bills and your retirement savings from your monthly income, and allocate what’s left over to spending categories or other savings goals.
How Employers Can Help
The Transamerica study found that 72 percent of survey participants are interested in receiving education from their employers about reaching their retirement savings goals. Employers can provide guidance to ensure that employees are aware of how much they’ll need to save and how much they should contribute. Only 14 percent of Americans know when they’ll max out their contributions. Employers may also elect to automatically enroll new employees in a 401(k) plan.
In general, financial literacy can go a long way in helping Americans prepare for retirement. One study revealed that Americans who receive financial guidance contribute a greater percentage of their annual salary to a retirement account. And another study found that Americans who are financially literate have double the wealth of those that lack financial skills and understanding.
The Bottom Line
Most Millennials are not aware of how to achieve financial security in retirement. Without the right guidance about what is needed to retire comfortably, Millennials may fall short and be unprepared. In fact, one survey found that 64 percent of Americans are expected to retire with less than $10,000. That said, most Millennials are doing their best to save, and they’re even getting started earlier than previous generations.