Abacus: Millennials, Finances, and Retirement
Roberto Westbrook
Myriad factors have placed Millennials at a disadvantage in respect to their predecessors. In fact, many in the generations above Millennials like to poke fun at their precarious financial position. Though, all humor aside, the focus on Millennials’ underwhelming finances is not necessarily misdirected. Homeownership is a proven example: a report from July 2018 found that homeownership among Millennials aged 25 to 34 was 8% lower than that of Baby Boomers and Gen X’s at the same age. Even higher rates of education among Millennials have done little to advance homeownership; ownership rates for highly educated Millennials were 5% lower in comparison to similarly educated members of the Baby Boomer and Gen X groups. Quite simply most Millennials live with their peers or at home.
This is indicative of greater financial woes for Millennials, the most prominent being retirement. Aside from homeownership, no financial goal looms over the generation more than the ability to retire at a reasonable age. Few instances portray the notion of hard work paying off better than retirement, a stage of life when an individual is able to peacefully transition out of the workforce and support themselves with the earnings they accumulated over the decades.
Perhaps no group in the United States has been more adversely affected by economic cycles than Millennials, with both the 2008 Great Recession and the current COVID-19 pandemic having devastating effects on financial markets and the workforce. Consider the steep stock market decline between 2007 and 2009, in 18 months the S&P 500 tumbled to half its peak value. Thus, leading to a rare aggregate loss for the index over the 2000’s first decade. However, it's not just falling asset prices that have mired Millennial chances for retirement.
One research paper by The Brookings Institute highlighted a number of variables that put people between the ages of 25 and 35 in an unfavorable position for retirement saving. One such factor is the growing need for contingent jobs, work that usually provides little security and offers fewer benefits than permanent jobs. Many positions in contract work, including freelancers, Uber drivers, manufacturers, and even certain consultants, do not come with the retirement packages that more traditional roles may include. Additionally, increased debt levels among Millennials has further stymied attempts to save.
In a survey conducted by the Morning Consult, Millennial respondents reported feeling especially nervous about debt in comparison to other groups. Of the 670 Millennials polled, more than half had some sort of credit card debt, while over a quarter had student loans from their undergraduate degrees. 68% of Millennials with credit card debt and 72% of Millennials with student loans reported feeling debt anxiety. This naturally leads to a dilemma; do you prioritize debt or retirement savings?
Deciding on an approach that balances paying off debt and accumulating savings is an entirely individual process. However, a universally sound approach is to address high interest debt as soon as possible. With the average interest on credit cards standing at about 16%, consumption debt should ideally be one of the main priorities for Millennials. Not to mention, debts with large balances, such as student loans, should also take precedence over investing.
One undervalued approach to tackling debts is to pay off the ones with the smallest balances first, as doing so could provide one with psychological momentum in eliminating small liabilities. Though, again, one ought to ensure there are not extraordinarily high interest debts accumulating silently. Once debt is generally under control, one can begin to effectively tackle retirement planning. The new questions of how much and where are now the crucial to address.
Common financial advice points to saving at least 15% of one’s annual income solely for retirement, but individuals with high incomes and access to company provided plans can save even more (and should). The less straightforward question of where to put your savings is a convoluted one.
For those who work at more traditional firms, employers may be willing to sponsor contribution-based accounts, such as a 401(k) in the private sector or a 403(b) among public and non-profit organizations. Two of the biggest advantages that are associated with such accounts concern employer contributions and tax favorabilities. Most companies that offer 401(k)s offer some sort of match contribution based on a person’s salary, with the average match of up to 4% of one’s salary. For instance, an employee earning a salary of $60,000 dollars utilizing a 401(k) matched at 5% by their employer, would receive $3,000 additional contribution from their employer. With a fraction of employer contributions being deductible and investment monies not being taxed, 401(k)s offer a great place to store long-term money.
Other popular account options include Individual Retirement Accounts (IRAs), which include traditional IRAs and Roth IRAs. The primary difference between the two pertains to taxes: the traditional route allows one to deduct contributions off their taxes, whereas Roth IRAs typically permit tax-free withdrawals in retirement-aged years, but necessitate that taxes be paid on contributions. For high income earners looking to alleviate the taxes due, a traditional IRA may be preferable, as contributions help minimize annual tax cost. Workers who are in a lower tax-bracket could choose a Roth IRA if they project that they won’t need to withdraw from their account at an early age.
Above all the planning and advice given on reducing debt and saving for future years, should be based on individual assessment of one’s financials. While managing debt can obviously be stressful, forecasting your future financial affairs can make for an enjoyable activity. Projecting how much money a person can make and save in their peak earning years, while simultaneously deciding how they may spend money in the future, can help reduce stress looking forward and can help ensure a tranquil retirement.
