According to a report from the Center for Retirement Research, millennials continue to lag behind older generations in retirement savings. The issue is becoming more pressing now that the older members of this generation are entering their 40s.
Gaps between millennials and former generations are beginning to close in terms of home ownership and marriage rates, but millennials continue to have a lower ratio of net wealth to annual income, and a higher ratio of debt to income.
Several factors underlie this problem, from greater debt burdens to more difficult job markets. However, with retirement only a few decades away for many millennials, figuring out a way to address this gap is extremely important.
The Big Challenges that Millennials Now Face
Millennials often have extremely high levels of student loans and credit card debt. In addition, people in this generation are now living through the second major recession of their working lives, and the wage stagnation in the aftermath of the 2008 financial crisis has prevented many of them from buying a home and accumulating wealth.
The entire picture is even more complicated when you consider the fact that many millennials now have families to take care of, as well as aging parents who may need financial support. Furthermore, with people living longer than ever, millennials generally have not received any inheritance to help with the situation.
The coronavirus pandemic has thrown yet another wrench into millennials’ finances. Studies have shown that a third of millennials have increased their credit card debt as a result of the pandemic, which makes it even more difficult to save for retirement. Spikes in unemployment during a time when many Americans were already struggling just to make ends meet has resulted in massive amounts of debt accumulation.
Moreover, two-thirds of millennials say that student loan debt is preventing them from saving for retirement. Many people report not being able to afford the payments on these loans. In addition, loan payments can take priority over saving for retirement, due to the compounding interest that can make them difficult to pay off completely. Currently, nearly half of millennials have less than $25,000 in personal savings.
The Problem Behind Saving for Retirement
Even with these economic challenges, some people blame millennials for their lack of savings. The most well-known example of this was Australian millionaire Tim Gurner’s 2017 criticism of millennials for spending ridiculous amounts of money on frivolous little luxuries—avocado toast and coffee. His comments drew so much attention (and laughter) that they became a meme almost instantly.
Avocado toast jokes aside, the issue is not one of knowledge or even self-control, at least not on the generation level. Of course, plenty of people, including millennials, make bad spending and saving decisions that affect their wealth. But when the issue persists across a generation, larger forces are at play than individual spending decisions.
Millennials understand that they need to save, but they are often saddled with debt and other responsibilities with few prospects for increasing their income without further monetary investment, such as returning to school. As a generation, millennials are smart and have a lot of ingenuity. This generation has access to an incredible amount of information and understands how to use it, but the social and economic situation does not allow this. Average hourly wages have not changed much in the last 50 years when adjusted for inflation, but the cost of housing, education, and other necessities have grown exponentially.
Millennials who have been able to save often find themselves needing to dip into their retirement accounts early. Nearly 40 percent of millennials have already withdrawn from their retirement accounts to fund unexpected expenses. People face steep penalties and limit their potential for compound interest growth when they do this, but early withdrawals from retirement savings may be a better option than going deeper into credit card debt. The bigger point here is that even millennials who have managed to save often do not reap the benefits of these savings.
The Challenges that Millennials Will Continue to Face
Outside of the economic pressures on millennials, this generation also faces more tangible hurdles when it comes to saving for retirement. Among previous generations, defined benefit pension plans were common. These plans provide a guaranteed monthly payout for life after retirement.
Today, these pensions are no longer an option for the vast majority of private-sector employees. Millennials now need to save primarily through a 401(k) and similar vehicles. These accounts were once viewed as a supplement to pensions, but now they need to fund the majority of a person’s retirement. Navigating this shifting situation involves some tough decisions about 401(k)s, IRAs, and Roth options, and how best to divide one’s money. There’s usually no one straightforward option.
The other major challenge millennials face is the gig economy. In the past decade, the gig market has expanded by about 6 million jobs, and many companies are hiring freelance remote workers as a way of cutting costs. The problem with this approach is that gig work lacks benefits. One survey showed that only 16 percent of gig workers have retirement savings.
While legislation is trying to change this, many people will struggle to save if they cannot become full-time employees. Furthermore, these people are at a disadvantage because they have no access to matching programs from employers for their retirement accounts. Retirement accounts open to gig workers are also notoriously complicated.