Data & Research September 28, 2016

Millennials Who Do Not Start Saving Soon May Never Catch Up

Given the likelihood of higher expenses coupled to weaker markets and slow-growing wages, one analysis suggests Millennials on average may need to save nearly a quarter of annual income to meet even modest retirement goals.
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In a recently released white paper, analysts suggest defined contribution (DC) plan participants may have to increase their savings rate to adjust for future market expectations in order to realize their target replacement income goal. For Millennials, that savings rate is 22%, according to research from NerdWallet.

A number of analysts predict that the slower growth of the U.S. economy after the Great Recession could cause stock market returns to fall from 7%, the current annual average, to a possible 5% in the decades to come, NerdWallet notes. The difference of two percentage points has big implications for younger adults who are just starting to save for retirement and also for those who’ve been investing for about a decade. Most retirement experts currently recommend saving 15% of annual income.

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However, NerdWallet analyzed the saving needs of a 25-year-old earning $40,000, the median average salary for ages 25 to 29, according to the U.S. Census Bureau’s 2015 Current Population Survey. Based on the 7% average in stock market returns each year since 1950, a 25-year-old earning $40,000 can meet a common retirement goal of replacing 80% of his or her income by age 67 by saving 13% of annual income. But if average annual stock market returns fall to 5%, NerdWallet’s analysis shows a 25-year-old will have to set aside 22% of annual income to save the same amount. That’s an increase of $3,400 this year.

NerdWallet suggests Millennials start saving now. Its analysis found that if a 25-year-old Millennial waits until age 35 to begin saving for retirement, he or she must save a nearly impossible 34% of income annually, or $16,400, to retire at age 67 with an 80% replacement income, assuming 5% annual returns.

In addition, it is important to get Millennials to participate in employer-sponsored DC plans and to save enough to receive the full company match in the plans, NerdWallet says. It also suggests that Millennials should be discouraged from putting all their extra cash into a savings account. “Millennials may be focusing on building an emergency cushion, but they shouldn’t let that goal push saving for retirement down the road,” says Arielle O’Shea, NerdWallet’s investing and retirement specialist.

The study report may be found here.

Data & Research September 28, 2016

Capital Group Survey Underscores Investor Anxieties

Nearly two-thirds of Gen Xers are kept up at night thinking about financing their retirement. 
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A new survey report from American Funds, a mutual fund provider operated by Capital Group, highlights just how anxious each generation feels about their financial future.

According to the survey data published in a report titled “Wisdom of Experience: Lessons Learned From Millennial, Generation X and Baby Boomer Investors,” nearly two-thirds (63%) of Gen Xers are commonly kept up at night thinking about financing their retirement, and one in three is worried they’re not earning enough money to be able to invest effectively for the future.

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“After experiencing the dot-com bust, the global financial crisis and the housing collapse, as well as stagnant wage growth during their formative adult years, Gen Xers—or Generation AnXious—are wary about their financial future,” suggests Heather Lord, senior vice president and head of strategy and innovation at Capital Group.

The research shows Boomers have the lowest expectations about future market returns, but they have the most optimistic outlook on their retirement. For Millennials and Gen Xers, it’s the opposite, according to the survey data: They are more bullish about the market, but less so about their own retirement.

“Over the next 10 years, only 16% of Boomers expect the market to do as well as the last five years of relatively strong returns,” Lord notes, “while nearly twice as many Millennials (31%) and Gen Xers (28%) picked the most bullish scenario.”

One positive finding is that all generations “feel smarter when they stick with a long-term investment strategy, with nearly two-thirds (65%) of Boomers adhering to this buy-and-hold mindset.” Also positive, an impressive 59% of Millennials currently in the work force say they began saving for retirement before age 25, compared to 42% of Gen Xers and 28% of Boomers.

“Despite concerns of Millennials about saving enough money for retirement, they do dream big,” the report highlights. “They expect to retire later than Boomers, but are least likely to expect to keep working part-time. Two-thirds of Millennials want to spend their time in retirement traveling the world.”

The full survey report may be obtained at www.americanfunds.com. 

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