With no pensions to bolster them, and the Social Security safety net fraying at the edges, young people need to save more than even for retirement––but they aren’t necessarily getting the message.
According to Newark, N.J.-based Prudential’s most recent Perspectives on Retirement, 40 percent of millennials, defined as those between the ages 21 and 34, aren’t saving for retirement at all, and those who are aren’t investing aggressively enough.
Prudential found that millennial investors in their 20s and 30s plan to retire at age 67 and will need about $1 million to fund their retirement.
Since 1926, the lowest rolling 30-year equity market return was 8.5 percent, and young investors can afford to take more equity risk. Over the best 30-year period, a $500 monthly contribution to stocks would return $1.86 million, as represented by the Ibbotson U.S. large stock index, while the same contribution to bonds would return just $875,000. Over the worst 30-year period, the equity return is even better, at $1.8 million, while the return on bonds decreases to $263,000.
Prudential says that younger investors will have to tilt their portfolios towards equities in order to reach their retirement goals, but many millennials who are saving for retirement get in their own way: 43 percent describe themselves as conservative, compared with 31 percent of baby boomers.
“It’s not surprising that many millennials are investing too conservatively,” said Jeremy Stempien, product specialist on the asset allocation team of Prudential's Quantitative Management Associates subsidiary. “They tend to make investment decisions based on emotions and experiences rather than their actual capacity or ability to take on risk.”
Stempien believes that the use of target-date funds as the qualified default alternative investment in employer-sponsored retirement plans will improve asset allocations.
Millennials enrolled in employer-sponsored plans have around 75 percent equity exposure, but Prudential warns that ratio may still be too low.
In a Prudential study of more than 1,300 adults, 34 percent of millennials said they had excellent or good knowledge of saving for retirement, but just 19 percent reported knowledge of investing and only 17 percent said they felt prepared to make financial decisions.