4 Reasons Millennials Must Begin Retirement Planning Right Away
“To be young again” is an expression meant to convey the carefree days of your youth.
Well, I definitely don’t envy Millennials at the moment because retirement may very well become a fantasy for them if they don’t begin changing course right away.
Here are four reasons retirement planning can’t wait any longer for this group.
Millennials Do Not Think They Will Retire
While most people completely misjudge how much they need to retire, Millennials have largely given up on the idea altogether. According to a recent article in Business Insider, 64% of Millennials don’t think they’re going to retire.
Unfortunately, there is a lot of evidence to support this tragic claim. We’re going to cover inflation below which definitely plays a role. However, there’s also a Millennial retirement crisis that is looming too.
Seeing this coming and feeling this helplessness could be the reasons so many Millennials have stopped saving. Those under 35 years of age currently show a saving rate of -2%. You read that right: negative 2%.
This means that they’re actually burning through their money or going into debt. There could be many reasons for this, but I don’t think it’s out of the realm of possibilities to suggest that it has a lot to do with this learned helplessness.
When you factor in how much debt Millennials already have, it’s understandable that a lot of them can’t imagine a day when they can stop working.
Retirement Planning is Expensive
Now, not all Millennials are running away from the idea of retirement planning. The problem is that once they see the number they need, they turn around and run in horror.
Robert Powell, a much-respected editor for Retirement Weekly, believes that most Millennials need $1.8 million to retire. That is definitely a lot of money, but it actually gets much worse for the generation born in the 90s. For them, Powell points out; it’s going to cost around $2.5 million to enjoy their golden years.
Again, recall from above that retirement planning isn’t even a priority for a lot of Millennials because they have enough financial worries as it is. It’s not that they’re lazy; it’s that between trying to pay off their student loans, cover their monthly expenses and keep some kind of savings on the side, finding $1.8 to $2.5 million doesn’t seem very realistic.
While there were a couple of assumptions made to get those above numbers, I don’t think they’re far off. For one thing, let’s say inflation hovers around 2% (the Federal Reserve’s current target). If so, a nest egg worth a million dollars right now will be worth roughly $530,000 when those in their mid-30s retire roughly 32 years from now.
Give it 48 years for the younger crowd and that money dwindles to $386,000.
Those Millennials who want to get in the game are going to have to save aggressively to have even a meager amount waiting for them when it’s time to call it quits.
Consider, too, that this generation’s Social Security benefits are most likely going to be far less than those who came before them. Most Millennials don’t have a generous pension to enjoy like their grandparents did either.
Millennials Hate Risk
Finally, Millennials have proven to be very averse to taking risks with their investments. When you consider all that has happened with the economy over the past 10 years or so, it’s probably not too surprising that Millennials have the same risk aversion as older generations.
Isn’t that a good thing?
Well, yes and no. It’s a good thing insofar as they probably won’t be rushing out to start another subprime mortgage crisis anytime soon.
That being said, when it comes to retirement planning, some risk is fine when you’re younger. You still have time to make up any significant losses and can get progressively more conservative as you near retirement age.
Remember how I mentioned most Millennials will need to get aggressive with their retirement planning if they want to stand a chance of ever leaving the workforce? Taking on some amount or risk is part of this.
Retirement planning involves mitigating as many risks as possible, of course. Again, part of the reason you take them on at a young age is so you can lessen their potential to damage your finances.
If a Millennial begins planning right away, they’re going to stand a far better chance of creating a functional, low-risk plan.
If they continue to wait, they’ll soon have no other option but to wade into that risk they hate so much.
Returns on Investment Are Going Downhill
Finally, even if retirement planning wasn’t expensive, Millennials weren’t risk-averse, and they did believe they would retire, there’s the simple fact that investments aren’t paying off like they used to. This is just one more reason to envy the baby boomers and feel bad for these newest generations.
It gets much worse, though. As I’ve talked about before, there’s a good chance you’ll never see a good return on investment ever again.
This is not good for all of us, but for those who have their retirements locked up or are already enjoying them, it’s not nearly as big a deal as it is for Millennials.
If they want to retire, they need to begin planning right away to take advantage of the last few years of even remotely good returns before things may get a lot more hectic.
Retirement planning doesn’t have to be impossible. As long as you can be realistic about where you are now, where you want to be and what it will take to hit your goal, it’s definitely possible.
I recommend Millennials begin saving 20% of their income, at the very least. This takes into account a sobering view of the situation and will help most people, even older Millennials, make up for lost time.
However, you have to start now. If you’re young, waiting will only make things much harder, not just because each year you put off saving is more you need to save each year. It’s also because the window of how much risk you can accept is closing, meaning so too are your options.