How Millennials Retirement Savings Got Off Track
The Current Reality
With inflation rampant and housing costs spiking, millennials face less-than-ideal conditions when it comes to saving for retirement. Building up reserves of any kind can be difficult as spending power is diminished, and savings goals often take a hit.
Still, millenials have been able to make some progress lately. Defined as people born between 1981 and 1996, the group increased its savings rate from 7.5% to 9.7% since the start of 2020, but still lags behind older generations. Analysts say the increasing cost of education is one reason, with student loans a major obstacle many millennials face.
Student Loan Factor
When it comes to higher education, millennials know both sides of the coin. Many people paying off student loans are also college graduates, meaning their lifetime earnings should be higher over the long-term. At the same time, a 2021 study from the Center for Retirement Research at Boston College found over 40% of those between the ages of 28 and 38 spend more than 40% of their income on student loan debt.
Analysts explain millennials are at a higher risk when it comes to underfunding retirement, due to increased life expectancy. Adding to this concern is the fact social security is underfunded and could begin paying out only partial benefits by 2034.
Take Advantage of 401(k) Match
In addition to factors like inflation, it’d be easy to blame the shortfall on millennials spending or saving habits, but there are other obstacles the generation must face as well. While over 75% of both baby boomers and Gen X’ers were eligible to participate in a retirement plan through their employer as of 2014, the number checked in at 55% for millennials.
When it comes to investing for your future, one of your biggest assets is time, but it’s important to start saving as soon as possible for retirement. Even a small amount of savings can add up over time.
The best place for most investors to start saving for retirement is in a tax-favored investment account, such as a 401(k) or IRA. If you are eligible for an employer-sponsored 401(k) plan, that’s a great place to start. Some employers offer a matching contribution up to a certain percentage when you contribute to a 401(k). Take a look at your employer policy and see if you’re able to contribute enough to get the full employer match.
Whether it makes sense to direct any extra cash toward debt repayment, savings, or investing (or some combination of the three) will depend on your current financial situation, your short- and long-term goals, and your risk tolerance.
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