The spending and savings habits of Millennials (those ages 25 to 35) are scrutinized in the Principal Financial Group Millennial Research Study, which contends that the majority could face dim prospects of a comfortable retirement, based on their inadequate current savings patterns.
In a recent survey of Millennial workers, 63% report they started saving for retirement before age 25. But less than one-third are saving at least 10% of their salary through their employer-sponsored retirement plan.
“It’s clear Millennials are aware of the importance of planning and preparing for retirement,” says Jerry Patterson, senior vice president of retirement and investor services at The Principal. “It’s also clear they are struggling to balance that with all the other demands needing their time and money.”
Most Millennials have not done the math to determine what level of savings they should be targeting, but all agreed that they were not doing enough, Patterson says, providing a tremendous opportunity for advisers to connect with this generation of young investors. “They need the direction, and in their hearts, they know it,” he points out.
According to the survey, 83% of Millennials take full advantage of matching contributions when offered through their employer-sponsored retirement plan.
“The employer match is a valuable and important incentive to get Millennials saving, but the amount of the match is not a signal to stop saving,” Patterson says. “Most matching formulas phase out once an employee reaches a savings level of three or four percent of pay—well short of the 10% experts indicate they should be saving. One easy remedy is for plan sponsors to encourage employees to save at a higher rate by ‘stretching the match.’”
Millennials are starkly different from other people, Patterson points out. “The ways they consume information and seek advice are dramatically different,” he tells PLANADVISER. “They learn much faster and in a much less linear fashion, and they are very digitally oriented.”
Part of the research reaffirmed what The Principal already knew: Millennials are hesitant to seek face-to-face advice, and fewer than half said they wanted to work with an adviser. “This could change over time as they age and acquire more money, but it’s been a consistent position,” Patterson says, and one that is in line with this generation’s growing desire to do things digitally and online (between 30% and 40%, according to Patterson), such as purchase financial products, or learn about finance and make financial plans (31%). Just 22% expressed a desire to plan and learn about finance with an adviser.
Patterson says that less-complex needs and less money could mean that Millennials currently are less interested in financial advice, but that their interest could rise as they age. “We’re educating advisers that advice is still really important, and advisers play a crucial role,” he says. “Our message is: don’t fight, join. Understand how they think and learn. Make the Web your friend, and leverage digital content to make your job more efficient.”
Retirement saving competes with many big-budget items for Millennials. Their three largest budget items, unsurprisingly, are mortgage/rent (65%), food (38%) and car/transportation (30%). Other major expenditures include basic expenses (27%), student loans (20%) and credit card debt (16%).
What may seem like primary obstacles to saving for retirement can usually be addressed by creating a plan and sticking to it, Patterson says. Not every individual is aware of it, but it is possible to save for retirement and pay down debt at the same time.
A substantial majority of Millennials (84%) said that young adults should be financially independent by age 25 or younger. Six of 10 Millennials said they expect to be better off financially than their parents. But some Millennials report their parents are still footing the bill for various expenses, including their cell phone bills (12%), car insurance (8%), health insurance (7%) and rent/mortgage (7%).
Other findings about Millennial savings habits in the survey are:
- 66% have established a monthly budget, and 35% use a digital-budgeting system.
- 57% have an emergency savings fund, but less than one-third (32%) believe their fund could cover basic monthly expenses for more than six months.
- If purchasing a financial product, 47% would prefer to do so with a financial professional either in person or over the phone; 38% would prefer to make the product purchase online.
Patterson says it is encouraging to see young savers getting started early, but that they need to learn that equally important as saving early is saving enough. According to The Principal’s research, he emphasizes, salary deferrals of 10% plus any employer match over the course of a working career is the key to achieving a more secure retirement.
The Principal Financial Group Millennial Research Study was conducted online in the U.S. by the Principal Financial Group between October and December 2014. Respondents were 867 American workers ages 23 to 35.
The Principal Financial Group Millennial Research Study can be downloaded here. Also available are videos of Millennials across the country that discuss their feelings about planning and preparing for retirement, and what specific steps they were taking to get there. These conversations can be viewed on The Principal’s website.