The Millennial Retirement Enthusiasm and Reality Gap: Bridging the Chasm Between Expectations and Financial Preparedness

Being interested in millennial savings and retirement trends, I have recently taken note of some fascinating data points published by TD Ameritrade regarding the views of young adults on these critical issues. The statistics presented were both heartening and disconcerting at the same time.

Early Retirement

On one hand, it was reassuring to find that Millennials (individuals born between 1980 and 1996) expressed a strong desire for early retirement. They reported an average expectation of retiring at age 56 with Millennial men planning to retire even earlier, aiming for age 53 on average. This is in stark contrast to the Baby Boomer generation’s traditional retirement age of 65 or later.

However, as I delved further into the data, a significant gap between enthusiasm and reality began to emerge. On the same note, Millennials said they do not plan to start saving for retirement until an average age of 36. This discrepancy between the desired retirement age and the time they intend to start setting aside funds is a cause for concern.

They are Behind

Investment compounding requires ample time to work its magic, and the difference between commencing savings at 25 as opposed to 35 has profound implications on your overall nest egg. Let’s take an example: if you were to save $10,000 annually at a modest 6.5% return, starting at age 25 would yield a far more substantial retirement fund than beginning at age 35.

To illustrate the extent of this difference, consider that saving one dollar in your twenties is the equivalent of $10.06 in your fifties (at an 8% return). Even with a 2% annual inflation rate factored in, you would possess 556% of the purchasing power you have today.

The TD Ameritrade report also highlighted some disturbing statistics about Millennial savings habits. It stated that only 38% are saving for retirement (which leaves 62% not engaging in this crucial practice). This finding aligns with another report indicating that a staggering 66% of millennials have no retirement savings at all – not even a cent to their name.

If you don’t start saving until the age of 36, achieving your desired retirement goal becomes an uphill battle. The odds are stacked against you accumulating the significant sums required to retire comfortably by the time you expect. Even if, by some miracle, you switch from “not saving at all” to becoming a world-class saver in a heartbeat, there is often no income base available to support this drastic change in behavior.

Then It Gets Worse

The Federal Reserve has further highlighted the challenges that lie ahead. In a landmark study of lifetime earnings, it was revealed that for the median earnings group, average earnings growth from ages 35 to 55 is ZERO. Moreover, with the exception of those in the top 10% of the earnings distribution, all other groups experience negative growth between the ages of 45 and 55.

This paints a dismal picture for millennials attempting to close the gap between their retirement enthusiasm and financial reality. The consequences of unrealized retirement predictions are severe – in some cases, never being able to retire at all. Furthermore, there appears to be an over-reliance on inheritances as a means of filling this savings void, which is often unfounded for most individuals.

What Should a Millennial Do?

So, how can you begin to bridge the chasm between your expectations and financial preparedness? Here are a few steps you can take:

1. Start saving early: The sooner you commence setting aside funds for retirement, the greater the impact compounding will have on your savings’ growth. There is no better time than the present to begin saving for your future.
2. Assess your income and expenses: Evaluate your current earnings and expenditures to understand where adjustments can be made. Can you cut back on non-essential costs to increase your savings?
3. Seek professional financial advice: Speak with a qualified financial planner who can provide guidance on how much you should save, the best investment options for your risk tolerance, and any other essential retirement planning information.
4. Educate yourself: Learn as much as possible about investing, different types of savings plans, and tax benefits associated with various retirement accounts such as IRAs and 401(k)s.
5. Take advantage of employer-sponsored retirement plans: If your workplace offers a 401(k) or similar plan, maximize your contributions to benefit from the matching funds provided by your employer.
6. Develop a contingency plan: Understand that your retirement goals may have to be adjusted based on unforeseen circumstances such as job loss, illness, or other unanticipated events.

By taking these steps, Millennials can begin to align their retirement dreams with reality and secure a more financially stable future for themselves. Remember, the journey towards a comfortable retirement starts one step at a time – and it is never too late to start.