By David Rae
According to a recent article in USA Today, older Millennials ¬(DOBs in the 80s) might need to save $1.8 million for retirement while inflation-plagued younger Millennials (DOBs in the 90s) may need at least $2.5 million socked away. So what’s up with that?
The USA Today article, ‘Millennial New Retirement Number? ($1.8 Million or More!)’ makes for a sobering wake-up call, particularly for those who are still paying off their student loans. Nightmares of living out their golden years eating day-old bread and government cheese, and barely able to afford the latest in Salvation Army attire, loom large. But look at the bright side, Millennials, you’re only about 30 or 40 years away from Senior Citizen discounts!
Many Millennials’ grandparents had pensions and just generally lived a more modest lifestyle. But if Millennials’ Gen X or Baby Boomer parents didn’t save for retirement, they’re in real trouble. Without the safety net of the de rigueur pensions of the past, they’re likely to struggle when they stop working, that is, if they’re able to stop working. As a Certified Financial Planner™, when I read the statistics of how many people in their 40s, 50s and beyond have zero savings, my veins run with ice water.
The USA Today article assumes Millennials can live on between $30,000 and $40,000 a year in today’s dollars and want to retire in their late 60s. It also assumes a 2% (currently the target of the Federal Reserve) inflation rate between now and retirement. Notice the wording is ‘live on’, not subsidizing your lifestyle with credit card debt or with regular withdrawals from the Bank of Mom & Dad.
Furthermore, it’s hard to plan for retiring in comfort when you haven’t yet attained that comfortable lifestyle now. So what is a Millennial (or a Millennial’s concerned parent) supposed to do with this information? Have you figured out how much you need to save for your specific situation? And if so, are you on track?
How much will you need to save?
$1.8 (or $2.5) million might sound like an unobtainable figure but you really do need to set aside this much. Why is the figure so high? First off inflation. The article pegs a 2% inflation rate, which jives with today’s estimated rates, but is below historical averages. According to inflationdata.com inflation has average 3.22% over the long term in the US. In concrete cash terms, after a 2% inflation rate a million dollars would be worth just $530,000 over a span of 32 years. Another way to think of this is that the price of an item will double around every 20 years assuming the 3.22% inflation rate
According to the USA Today article, “The oldest Millennials, assuming they have no money set aside today and that they earn 5% on their investments, will need to sock away $2,000 a month for 32 years to accumulate a $1.8 million nest egg. And the youngest Millennials would need to save $1,000 a month for 48 years to accumulate $2.4 million.”
Unfortunately, if you are making $30 to 40K per year, it will be nearly impossible the save this much even if you split the rent with 17 roommates. A few ways to meet that intimidating monthly amount is to work longer hours, get a second job, are lucky enough to have – and take advantage of any and all employer matches on your 401(K) plans, or are able to achieve better investment returns.
The numbers needed to achieve a minimal standard of living in retirement with the USA Today assumptions may sound outrageous, but they are possible to reach. If younger millennial were to start saving NOW, and put away $370 every month until retirement, they would be on track assuming an 8% return on investments. For older millennials that number jumps to $1000 per month with all the same assumptions. If this doesn’t highlight the absolute fabulousness of compound interest I don’t know what will. Would you rather save $370 per month or $1000 per month? Get started saving today.
When to start saving?
In a nutshell, the sooner and more aggressively you save, the earlier you may reach financial independence. How will you know you’re there? Easy, it’s the day that work becomes an option, not a necessity.
So how far behind are millennials at this juncture? Realistically, in my opinion many are way behind. The upside is you have time to play catch up but procrastinating for too long will make meeting your financial goals harder. And since those of you in your 20s and 30s can expect to live longer than your parents or grandparents, this also increases how long your life savings will have to last.
Now don’t get cocky if you’ve already started saving. I have a few Millennial clients who have already saved well over the $2.5 million dollar mark, and even more who are on track to surpass that. But remember, THE MORE YOU MAKE THE MORE YOU NEED TO SAVE. This means that if you are pulling in more than $40,000 per annum, you will need to save more than the numbers above to maintain your desired lifestyle in retirement.
How to start saving?
Of course, I wouldn’t base your whole financial plan or retirement security on a newspaper article (or even a Huffington Post blog from myself.) You’ll want to have a specific program tailored to your unique timeframe and situation. Consider working with a trusted financial planner to figure out that plan and make sure you know the numbers that work for you and your family.
While my handsome husband is a full-on Millennial, I am just the eensiest bit too old to count as one myself (I answer to Millennial with Benefits). One of the most profound gifts we give to each other – and proof positive of our commitment to our marriage – – is that we stay on track for our retirement goals.
Whether coupled or single, …read more
Read more here: Millennials Seeking Millions