Why this could be one of the best ways to invest in America’s future
January 16, 2018 by ANGELA M. ANTONELLI
Millennials, the generation born between the early 1980s and the mid-to-late 1990s, make up about one-third of today’s U.S. workforce. They are better educated than previous generations, with a greater proportion of them possessing a college degree. Because they have lived through the Great Recession, they are more risk averse. They are also more likely to begin to save earlier in their careers.
Many millennials believe they will need to take action on their own to save for their retirement. Four out of five millennials surveyed are worried that Social Security will not be there for them when they are ready to retire. Not surprisingly, 55% cite self-funded savings as the expected primary source of retirement income according to a recent survey by the Transamerica Center for Retirement Studies.
But today’s 53 million millennial workers face challenges when it comes to saving and investing for their retirement. This generation is disproportionally burdened by money-related stress, with 24% reporting that student loan debt is the source of this stress, according to a recent survey by Charles Schwab. And 72% of millennial workers surveyed by Transamerica agree that they do not know as much as they should about retirement investing and, among those participating in a retirement plan, a quarter admit to being unsure of how their savings are invested.
Helping the youngest workers today understand the importance of securing their long-term financial well-being is an investment that will yield significant benefits. How soon and for how long an individual saves is important because of the power of compound interest. For example, compare a person saving $100 a month starting at age 27 with a person saving the same amount starting at age 37. The first will have contributed just one-third more by age 67, but would accumulate twice as much in savings, assuming a 6% annual rate of return.
Job mobility creates challenges
Today’s younger workers are more likely to work in nontraditional job settings and more likely to switch jobs than other age groups, according to Bureau of Labor Statistics (BLS) data. The median job tenure among workers age 25 to 34 (2.8 years) is less than one-third of older workers age 55 to 64 (10.1 years). What’s more, 55% of jobs held by those ages 18 to 28 lasted less than one year, and 70% of jobs lasted no more than two years. The challenges that come with frequent job changes include not staying long enough to become fully vested in the company 401(k) plan, the failure to roll over their retirement savings into new retirement plans, or forgetting about their account altogether when they change jobs.
It’s not only job mobility that can hinder saving for retirement. Millennials either out of necessity or because they are attracted to the schedule flexibility often freelance or work more than one “gig” job. Today almost half of working millennials do freelance work and one-third of them are full-time freelancers, according to a 2017 study by Upwork and Freelancers Union.
But this often means greater income instability and losing access to benefits such as employer-sponsored retirement plans. Workers are much more likely to save if their employer provides a retirement plan. More recently, new state-facilitated retirement savings programs as well as new low-cost, simplified mobile “fintech” (financial technology) platforms offer the potential for greater access to ways to save for gig employers and workers.
The value of behavioral nudges and financial wellness
Workers under 30 are more likely to identify as “do it for me” investors than workers over 30, expressing that they want advice from investment professionals, and indicating they would appreciate notifications such as alerts when they are not saving enough, according to J.P. Morgan Asset Management. They also prefer features in their 401(k) plans such as automatic enrollment and automatic contribution escalation. Such nudges could prove effective, especially when Transamerica reports that 52% of millennials surveyed admit that they “guessed” the figure needed to save for retirement and only 10% used a retirement calculator or work sheet.
Millennials have a lower level of financial literacy than older workers. Many of the most important financial decisions, including investing in higher education, saving for retirement, and purchasing a home, are made early in adult life. Addressing common budget challenges young workers might face such as paying off student loans, mortgages, and credit card debt, could help them save for retirement. For example, it is not necessarily true that a young worker cannot or should not save for retirement if they carry any debt. While it certainly makes sense to pay off a high-interest loan, a young adult may be better off in the long run putting some money away for retirement while also paying down a low-interest student loan. Providing opportunities to focus on the bigger picture of financial wellness can help workers better navigate these competing financial demands while encouraging planning and budgeting for unexpected expenses.
The greatest success and gains in strengthening retirement security will not come from helping workers who are already close to retirement age. It will come from helping the youngest workers understand the importance of starting to save as early as possible, and making saving easier.
In a recent survey of retirement plan participants by American Century Investments, 90% would tell their younger selves to save more. In 2016, the population of millennials surpassed the baby boomers. With the rise of the gig economy and the lack of access to traditional employer-sponsored retirement plans, new thinking about financial education and wellness, new retirement savings products and programs, and the value of behavioral nudges is needed to encourage young working adults to begin to save sooner so they can save more for their retirement.
Angela M. Antonelli is a research professor and the executive director of the Georgetown Center for Retirement Initiatives at the McCourt School of Public Policy.