Earlier this week, an old Wall Street Journal article made its way across my Twitter feed; the title immediately caught my eye: Most Millennials Don’t See Becoming Millionaires, Study Finds. I’ve shared the article below, but if you don’t have a subscription to the Wall Street Journal, you won’t be able to read it because it’s hidden behind a paywall. Side note: I’d recommend getting a subscription to WSJ, even if it’s just a digital subscription, which is what I have.
Since you may not be able to access the article, allow me to share some of the lowlights:
- According to a Wells Fargo survey, conducted in April of 2016, 64% of working Millennials say they will never accumulate $1 million in retirement savings.
- Student loans, low incomes, not working in preferred careers, and the gender wage gap are reasons mentioned for the Millennial pessimism.
- The median student loan debt for those surveyed was $19,978.
- Only 59% have started saving for retirement.
- 69% of these Millennials are saving in an employer-sponsored plan like a 401(k)
- 44% of these Millennials are saving between 1% to 5% of their income.
- 33% of these Millennials are saving between 6% to 10% of their income.
- 6% of these Millennials are saving between 11% to 14%.
This article troubles me for a number of reasons:
I. For Millennials, $1 million will NOT be enough to retire. To retire comfortably, which I know is a relative term, Millennials will need significantly more than $1 million in their retirement savings–how much will be needed depends on the individual. I have a number of clients retired today with less than $1 million in retirement savings, but they have a number of advantages over the Millennials:
- Pensions. Defined benefit plans (pensions) are being replaced with defined contribution plans (401ks), and this trend is unlikely to change. With people living longer, the liability of employee pensions is too great for employers, which has resulted in the burden of creating a retirement income being shifted onto the employees. With the exception of government employees and teachers, very few Millennials will retire with the luxury of a lifetime pension. The lack of a pension will require Millennials to have more in retirement savings than current retirees with a pension to create a similar income stream for life.
- Social Security. When Social Security was first rolled out in 1935, the average life expectancy was 62, and the earliest Social Security was to be collected was 65. It was a retirement benefit intended to be collected by few and for a very short time. Today, benefits are collected as early as 62, and people are living well into their 90s, and with the exception of extending the full retirement age and a few years of no COLA increases, there has been relatively little change to the program. Eventually, the system will go through some sort of reform, and because of this, the future of Social Security is too uncertain for Millennials to rely upon it for retirement planning. Similar to not having a pension, the uncertainty of Social Security will require Millennials to have more in retirement savings.
- Millennials are spoiled. I can say this because I am a Millennial. Our parents didn’t do a great job of telling us no. We received new cars when we turned 16. We studied abroad in college. We played Division III basketball at expensive small private colleges (ok, that one may just be me). This has led to Millennials preferring to indulge in the finer things in life. And now thanks to social media, keeping up with the Joneses is constantly in front of Millennials. It doesn’t matter if the images of the Joneses are staged and marketing ploys, the need for the newest and greatest is kept front and center. Because of this, I expect Millennials to have higher expenses (adjusted for inflation) in retirement than current retirees; in other words, if Millennials were retired today, they would want/need a higher retirement income than current retirees.
While I position these factors as advantages for current retirees, I don’t necessarily view these as disadvantages for Millennials. Instead, I view them as reasons Millennials need have their sights higher than $1 million in retirement savings.
II. Let’s just pretend $1 million would be enough for retirement, since this is the number the study picked. It is not unreasonable to to accumulate $1 million by retirement. $5,009.13 a year will get you there. Allow me to show you how I arrived at this number: $0 saved today (Present Value), 40 years until retirement (N), 7% investment return (I), $1,000,000 ending balance (Future Value) and we have a simple time value of money calculation solving for the annual payment, $5,009.13.
This is a simple calculation, and I’m aware that there are many circumstances that can keep Millennials from saving $5,000 a year–student loans being the main money suck for Millennial savers. But, the takeaway from the calculation should be it does not require an astronomical number to reach $1 million. So if the goal is to accumulate $1 million, it is completely attainable for Millennials to do. It will require budgeting and prioritizing, but it can be done.
If you want to get serious though, let’s start planning for $3, $4, or $5 million.
III. I hate the negative mindset portrayed in the article. Why would Millennials think they can accumulate $1 million, or any number for that matter, when the headlines tell them they can’t. It’s not just this article. I’ve read others highlighting studies telling Millennials they will be the first generation to do worse than their parents.
Of course, if Millennials go through life believing they are destined to do worse than their parents and they won’t be able to accumulate wealth, they won’t. It will become a self-fulfilling prophecy.
Instead of setting the expectation of failure, the narrative should be honest, but constructive. I prefer to tell my Millennial clients it’s not going to be easy to prepare for all of the goals they have–it’s going to be hard work and require sacrifice, but if they are serious about their goals, it can be done. Millennials have advantages prior generations did not have, which will make accumulating the wealth needed for retirement attainable:
- Millennials know they need to prepare for retirement (and other goals) early. The excuse of not knowing can no longer be used. It is no secret that preparing for long term goals needs to start ASAP. There is a generation that did not grow up with CNBC and Money Magazine. They did not have blogs educating them on the importance of saving for the future. They did not have automatic enrollment and target date funds in 401(k)s. Millennials are not that generation. Millennials have witnessed parents and grandparents delaying retirement because of a lack of planning, or a late start. Millennials have witnessed what greed and irresponsible spending can cause during the Financial Crisis. Millennials have access to financial information at their fingertips. Ignorance will not be the reason Millennials are not prepared for their goals.
- Technology. Technology has allowed for investors to have more resources than ever. Technology has not only allowed Millennials to better educate themselves on personal finance, but it has also leveled the investment playing field. Thanks to technology, investors have access to asset classes once reserved for high net worth individuals. The barriers to entry and costs of investing have been greatly reduced because of technology. Technology has also allowed financial advisors to develop business models specifically geared towards Millennials giving them the opportunity to begin planning for their futures earlier than any other generation.
- Time. Millennials have an incredible advantage now that they know the importance of saving and planning…time. Millennials have at least thirty to forty years to plan for retirement and to accumulate the retirement savings they will need. Why is time so valuable? Compounding interest–Einstein coined compounding interest as “the most powerful force in the universe”. Forty years of compounding interest is how an annual savings of $5,000 ($200,000 total in savings) grows to $1,000,000.
- Financial Advisors. As mentioned above, technology has allowed financial advisors to turn their attention to Millennials. Until recently, young professionals were not able to get help from financial advisors. It sounds cold, and it is, but in the past financial advisors could not make a living helping young professionals, so they didn’t seek to help them. Instead, young professionals looking for help ended up working with salespeople and became very well insured, but lacked an actual financial plan. This has all changed; there are a growing number of financial advisors working with Millennials to help them develop financial plans to make progress towards their goals. Financial advisors now work with Millennials using retainer fees, monthly subscriptions, and hourly rates. A lack of access to advice and planning is no longer an excuse for not accumulating the wealth needed for retirement.
I’m hopeful Millennials will begin to change their views on their future. We are living in a time that is is providing us with more tools and access to accumulate wealth than any other generation. Yes, we have headwinds to fight against, but every generation has–they just look different.
Contrary to the finding in the Wells Fargo survey, I’m here to tell Millennials you can accumulate $1 million before retirement. But, you’re going to need far more than $1 million to retire comfortably. The good news is you have the advantages that no other generation has had at your age to help you plan for your future. There is no time better than the present to start your planning–and fortunately, there are plenty advisors here with the expertise to help you.
Interested in learning more about how my firm works with Millennials? Click here.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
*Originally published here.
Justin Castelli is a CERTIFIED FINANCIAL PLANNER™ and CERTIFIED INVESTMENT MANAGEMENT ANALYST® professional. He is also the founder of RL Wealth Management, which was started in 2015 with the goal of providing financial planning for not only his Baby Boomer clients, but also his peers. Rather than only working with clients on an assets under management (AUM) basis, he also works with young professionals and entrepreneurs through a monthly subscription model.
Contact Justin: [email protected] (317) 813-9984