In the Nation's Interest

How to Avoid a Millennial Retirement Crisis

by SEAN HICKS

According to Nerd Wallet, most of today’s college graduates will not be able to retire until age 73—more than a decade after the current average age of 61. Due to high student debt, many Millennials will spend the first decade of their career paying off debt instead of saving for retirement, as student debt has a significant effect on retirement savings. Furthermore, Social Security benefits will not be enough for most Millennials to sustain their standard of living during retirement. Given this perilous outlook, what steps can Millennials take to ensure a long and prosperous retirement? Fortunately, the answer is something many Millennials are surprisingly adept at: saving.

Despite widespread sentiment that Millennials are doing a dismal job when it comes to personal finance (Yahoo! Finance seems to run a few articles proclaiming so each week), there’s reason to believe Millennials have the right attitude on saving. The eighth annual America Saves Week survey, published in February by the Consumer Federation of America, a consumer advocacy group, reveals many positive findings about Millennials and savings, among them:

• The percentage of 18-to-34-year-olds who saved at least 5% of their income increased from 50% to 56% in 2014
• The portion of Millennials with a spending plan that allows them to meet their savings goals increased from 34% to 39%
• The portion of Millennials who utilize a savings plan rose from 43% to 47%
• The portion of Millennials with an emergency fund to cover unexpected expenses rose from 53% to 64%

Furthermore, Stephen Brobeck, executive director of the Consumer Federation of America and co-founder of the annual America Saves campaign, adds: “Younger people are now starting to become more hopeful, thinking that the future may be better than the present.” That’s important, because when people are more hopeful they save more, creating a snowball effect of wealth generation. 

However, as encouraging as these findings may be, they are contrasted with data showing that today’s young people are behind on many key financial metrics, including net worth and dollar value of retirement accounts. Given that the average college graduate with a bachelor’s degree owes approximately $30,000 in student loans, it’s easy to understand why Millennials are lacking at building wealth. So while Millennials may be meeting their financial goals, they are starting from a lesser place, and as a result, are woefully behind.

Of course, there’s not much an individual can do about student loans, if one already has them—or a sluggish job market. That being said, Millennials have the ability to address this problem in their daily lives. Below are a few tips to help Millennials, including those with student loan debt, build a strong financial foundation.

1) Understand your goals. Develop SMART (Specific, Measureable, Achievable, Results-Focused and Time-Bound) goals and then work to understand the financial implications of stated goals.
2) If you have student loan debt, develop a loan repayment plan. So often individuals are entered into a loan repayment plan without a true understanding of the plan. While income-based repayment may be right for some, it is not right for all.
3) Start to save as soon as possible. Ideally, Millennials should save as much as 15-20% of their income, but if that’s not feasible, it’s still good to get in the habit of saving something—and making it an automatic transfer to a savings account—with clear goals on how to grow those savings.
4) Develop an emergency fund, but after that make savings interactive. This can be done through the development of investment accounts, visual retirement accounts and other goal-driven metrics. Visualizing progress is an effective incentive to save more.
5) Take ownership over your financial life. Fully understand your current fiscal situation, your financial goals and learn more about topics that you’re unsure of. Most Americans will fail a financial literacy quiz, so don’t hesitate to ask for help learning.

The federal government has also begun to take a leadership role in helping individuals, including Millennials, save for retirement. A program, called MyRA, which is a simple vehicle that allows individuals to get into the habit of saving for retirement, was announced by President Obama in his State of the Union address last year. In addition, the federal government has the ability to assist individuals with unbiased advice when it comes to balancing the desire to pay down debt and get ahead on retirement planning by providing calculators to help understand the costs, benefits, and risks associated with different strategies for debt repayment.

Moreover, state and local governments have the opportunity to incentivize and assist individuals in managing their debt and planning for their financial future. This can be done through creative public-private partnerships and through partnerships with institutions of higher education.

Historically, generations that come of age during economic downtrends remain financially prudent throughout their lifetimes (think: the Great Generation). So far, this has proven true for Millennials. The Great Recession has created a generation of “super savers” who are saving at a high rate because they have little trust in the global economic system. However, to attain a long and prosperous retirement, Millennials will need to transform into “super investors” to put themselves, and future generations, in the best position to avoid an individual-driven retirement crisis.

Bryan Ashton serves as an Assistant Director within the Student Life Student Wellness Center at The Ohio State University, overseeing financial education and outreach, Scarlet and Gray Financial peer to peer financial coaching and other functions related to student finances. Additionally, he is the Co-Founder and Co-Chair of the National Summit on Collegiate Financial Wellness. 

Sean Hicks serves as External Relations Coordinator for the Committee for Economic Development.