Millennials Are Saving Early for Retirement

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Millennials Are Saving Early for Retirement

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Original Article: The Street    |   Written By: Ellen Chang


Millennials are prioritizing saving for retirement and increasing the amount of money they contribute from their paychecks. A recent Bankrate survey found that 30% of younger Millennial employees or those who are 18 to 26 years old boosted their retirement savings contributions in 2017 compared to the previous year. The report said that Millennials contributed the most compared to other generations. “Millennials are saving earlier and saving more for retirement than their predecessors,” said Greg McBride, chief financial analyst of Bankrate, a New York-based financial content company. The increase in savings can be attributed partly to more employers taking part of auto enrollment and auto escalation policies in their 401(k) plan. “New employees are automatically defaulted into the plan and the amount being deferred automatically increases each year,” he said. The report found that more Americans are saving and reached a six-year high — 23% of employees increased their retirement savings contributions during 2017 while only 16% reduced their contributions during that time.

These findings demonstrate a positive turnaround compared to 2011 when only 15% of employees increased their retirement contributions and 29% of workers had slashed them. Saving for retirement is becoming more important for Millennial employees since they witnessed the Great Recession and the impact it had on their parents, said McBride. “Having had a front-row seat for the financial crisis has instilled a greater inclination toward saving — for both retirement and emergencies — among Millennials,” he said. One looming issue is that too many Millennials are investing their retirement money too conservatively compared to Gen X-ers and Baby Boomers and allocating their money into cash instead of the stock market.

As Millennials become older, many are realizing that relying on funds from Social Security is not a good option, since the monthly stipend will likely decline when they retire, said Ron McCoy, a portfolio manager of the LOWS Strategy on Interactive Brokers Asset Management, the Boston-based online investing company, and CEO of Freedom Capital Advisors in Winter Garden, Fla. “I think the younger generation knows they must start saving now,” he said.

One motivating factor that Millennials have experienced is the continuation of the bull market for stocks. “The market going up for the last several years, I am sure, has been encouraging to many who see their retirement plans increasing every month,” McCoy said. The focus on the lack of retirement savings in the U.S. has been an impetus in prompting Millennials to start saving sooner and not waiting until all of their debt such as student loans and credit cards are paid off.

Too many Millennial employees are not leaning toward the right investments and still choosing ones with low returns because they are less risky, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. The average annual return since 1926 for large capitalization stocks is 10%, while investing in government and corporate bonds generates around 6% and cash results in only a 3% return. “Academic studies show that asset allocation is much more important to investor success than the specific assets purchased and the reason is compounding,” he said. “The higher the annual return, the greater the power of compounding.” If a 25-year-old started saving $2,000 annually in an account earning 10% compounded annually, she will have amassed over $885,000 by the age of 65, Johnson said. If that same Millennial invests the same $2,000 annually in an account earning 6% compounded annually, she would only have amassed a little over $309,000.

“The choice of asset class matters and Millennials should not be overly risk averse due to their long-time horizons,” he said. “The mantra for individuals should be to ‘save early and often’ as ‘time in the market is more important than timing the market.'” While many Millennials are saddled with student loans and credit card debt, saving money from each paycheck should remain a priority, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla. ” “Instead of being focused on fear and market volatility, Millennials should focus instead on the year they may retire,” he said. “Remember the adage to ‘pay yourself first’ while living within your means.”

Even though many individuals have large amounts of student loans, planning for retirement should not fall to the wayside, said K.C. Ma, director of the Roland George investments program at Stetson University in Deland, Fla. “With the historically high student debt on their backs, Millennials really have to plan for their retirement earlier than ever before,” he said. “If someone starts saving $5,000 a year for retirement at the age of 22 for a 10-year period and then stops contributing, that person will have a larger retirement fund at 65 than the next guy who starts to invest at age 32 with $5,000 a year for next 33 years. The first 10 payments will outperform the following 33 same payments.”

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