Forty years ago, the Revenue Act of 1978 was signed into law, including a provision—known today as the “401(k)”—allowing for workers to save money pre-tax. Since then, the 401(k) has supercharged retirement savings for a generation of workers. Yet research by Natixis Investment Managers shows that the millennials, who are coming of age in a vastly different era, may not have all the information they need to navigate their own financial futures.
According to Pew Research Center, the millennials, those born between 1981 and 1996 and now aged 22–37, already make up a third of the U.S. workforce, and some have been generating paychecks for two decades. But unlike other generations, millennials also face enormous headwinds such as high college debt, record housing prices and a bleak outlook when it comes to Social Security, which is expected to be technically insolvent by 2034, as stated by the Social Security and Medicare Board of Trustees. That may be why 41 percent of millennials don’t expect that it will be there by the time they retire, Natixis’ research found.
Fortunately, when it comes to its financial future, this generation is taking it seriously; in fact, the Investment Company Institute has reported that millennials are saving for retirement significantly earlier than baby boomers—they began saving for retirement at a median age of 23, versus 37 for baby boomers.
However, starting saving at an earlier age does not by itself guarantee a solid financial outcome. It is just one ingredient in long-term financial success. According to Natixis’ research, there are four core areas in which more education is needed to improve financial outcomes for the millennials. Here is what we learned:
1. Millennials Underestimate How Long They Will Live
Natixis’ research shows that millennials plan on retiring at age 59 on average and assume they will spend 25 years in retirement. However, the fact is that many millennials—like many boomers and Gen-Xers—are projected to live well past age 84. As a result, “longevity risk”—the possibility of outliving one’s assets—is a growing concern. Millennials who expect to live only to 84 could easily spend their final years with literally no savings.
2. The Basic Concepts Of Building Wealth Are Not Clearly Seen
Inflation is really about rising costs and the corresponding decline in how far the same amount of money will go. Simply put, if the rate of inflation is higher than the rate of your savings account, your money won’t go as far. Natixis’ research also shows just 7 percent of millennials factor inflation into retirement savings planning. This likely is because inflation has been low during their lifetimes, hovering around 3 percent or less for most of their lives, according to data from the Bureau of Labor Statistics. This is dramatically different from the double-digit inflation their parents or grandparents experienced when they were building their nest eggs.
3. Missing Out On The Power Of Compounding
Although about half (48 percent) of the millennials Natixis surveyed understood how compound interest works, about half (52 percent) did not. Given that compounding is one of the biggest drivers that helps your money grow, this lack of understanding by half of this generation is somewhat alarming.