When it comes to retirement—and saving and investing in general—millennials often get a bad rap, thanks to the FOMO (“fear of missing out”) phenomenon and their perceived weakness for avocado toast. The reality, however, is that the younger generation is giving older Americans a run for their money as they plan for the future.
Millennials: Outstripping Boomers and Gen Xers
Millennials are taking retirement seriously, and one of the ways they’re getting ahead is by saving earlier. According to the 2016 Wells Fargo Millennial Study, the average age at which millennials make their first contribution to a workplace retirement plan is 24, compared to nearly 33 for boomers. Fifty-nine percent of millennials have started socking away money for retirement, and 50 percent of them are saving 6 percent or more of their income.
Delaying savings can be costly. Assume that you’re 23 years old and making $32,000 annually with a 2 percent annual pay raise. If you contribute 5 percent to your employer’s plan each year, with a 2 percent annual contribution increase up to a 13 percent maximum contribution, you’d have over $1.2 million saved by age 65. If you wait until age 32 to begin saving, however, you’d have just over $602,000—51 percent less money for retirement.
Another difference between millennials and other generations lies in their expectations about Social Security. According to the 17th Annual Transamerica Retirement Survey of Workers, 81 percent of millennials are concerned about whether Social Security will be a viable source of income in retirement. Fifty-five percent expect most of their retirement income to come through self-funding, including saving in a 401(k) or an individual retirement account (IRA).
Thirty-four percent of boomers say that Social Security will be their main income stream in retirement, and only 25 percent have a backup plan for funding their later years. In the middle is Generation X, the investors who are most concerned about Social Security falling short. They’re doing very little to counter those fears, however. In the previous 12 months, for example, 40 percent of millennials increased their 401(k) contributions, while just 30 percent of Gen Xers did the same.
Millennials and older generations are also divided on how much risk is appropriate to take in their portfolios. In a Legg Mason survey, 82 percent of millennials said their investment decisions are influenced by the financial crisis of a decade ago, compared to 39 percent of Generation X, 13 percent of baby boomers and 14 percent of investors aged 65 or older. That doesn’t mean, however, that they’re completely averse to taking sufficient risk to generate higher returns on their investments for retirement.
According to the survey, 78 percent of millennials said they planned to take more risk with their portfolios in the next year. Forty-five percent said they’d take “much more” risk, compared to 27 percent of Gen X investors. That signals younger investors’ willingness to think long term and use the power of compounding interest over time to grow their retirement wealth.
Save for Retirement Like a Millennial
If you’re not a millennial, you can still save for retirement like one. All it may take is a little adjustment to your strategy.
You can start by saving in your employer’s plan if you’re not already doing so. At the very least you should be saving enough to qualify for your employer’s matching contribution, if one is available. You should also be looking into your plan’s auto-escalation feature, if there is one. Automatic escalation allows you to increase your elective salary deferrals each year incrementally. According to Fidelity Investments, the average 401(k) balance reached an all-time high in the fourth quarter of 2016, driven in part by auto escalation.
You should also be looking beyond your employer’s plan as a savings option. Fifty-four percent of millennials in the Transamerica survey said that they’re saving for retirement outside of work. An IRA can offer a tax-advantaged way to save, and a Roth IRA can be particularly beneficial if you expect to be in a higher tax bracket when you retire. With a Roth, you don’t get a tax deduction on your contribution but your qualified withdrawals are 100 percent tax free.
Adjusting your asset allocation to reflect your risk tolerance is also important. Investing too aggressively, based on your timeline until retirement, could subject you to losses that you can’t afford. Playing it too safe, on the other hand, could cost you valuable earnings.
Finally, if you want to grow your retirement savings like a millennial, leave your nest egg alone. Thirty percent of Gen X investors and 28 percent of baby boomers say they’ve tapped their 401(k) or IRA ahead of schedule, compared to 22 percent of millennials, according to Transamerica. The reason? Millennials are more likely to have emergency savings to fall back on, so they don’t need to drain their retirement. Diverting some of what you’re saving in a 401(k) or an IRA into an emergency savings account in the short term could keep you from having to drain your retirement assets in the long term. You also avoid both penalties on withdrawing your money prematurely and, in some cases, limitations on how fast you can pay it back.