Many people only see millennials as a coffee-addicted, selfie-snapping, live-forever-with-mom-and-dad generation. But when it comes to finances and saving for retirement, these young workers are doing better than their older counterparts in many ways.
While many in the millennial generation faces financial challenges that are unique to their age group, such as paying off a heavy burden of student loan debt, many are taking important steps to get on a path toward a more secure and comfortable financial future.
They’re Starting to Save Early
Perhaps contrary to the myth of millennials as poor planners, they’re actually starting earlier than older generations to save for the future. Natixis Global Asset Management found that millennials on average began saving for retirement four to eight years sooner than Baby Boomers or Generation X savers. Indeed, an August 2016 survey by Transamerica found that a remarkable 72% of millennials are saving for retirement, either through a workplace retirement plan or on their own. And many of these Millennials started saving early–at a median age of 22.
That means a large portion of this generation are putting the power of compound growth to work for their financial future.
They’re Building Good Savings Habits
The Transamerica survey revealed a 7% median savings rate among millennials who participate in their workplace retirement plans. Only baby boomers are saving more–mostly because their retirement is right around the corner.
Not only are millennials saving money now, they’re saving more as time goes on. More of them reported increasing their savings rate in the past year (40%) than did boomers (28%) or Generation Xers (30%), according to Transamerica.
Savers are assisted in saving more for their future by new features of 401(k) plans, such as auto-escalation, which automatically increases the amount a participant contributes to their retirement plan every year.
They Stick to a Budget
Being able to plan and adhere to a spending plan can help people stay true to their savings goals. Plus, the discipline that comes with sticking to a budget helps when tackling stressful financial situations that invariably arise.
Millennials like to spend money, similar to people in older generations. But where millennials outshine others is in budgeting–78% say they follow a budget, as reported by Chase. In the same survey, only 59% of boomers reported staying loyal to a budget.
What Millennials Can Do Better
Up the Proportion of Savers. Impressive as it is that nearly three-quarters of millennials are already saving for retirement, that still leaves more than a quarter who aren’t doing so.
Worse, Wells Fargo found that among the procrastinators, many don’t plan to start saving until age 32. This lost decade of savings after hitting the workforce can cost millennials dearly. Denver-based financial adviser Carden Capital Partners calculated how much a person would have to save each month to accumulate $1 million by age 65. Assuming an average annual return of 6.5% in a tax-deferred account, a 20-year-old would need to save $310 each month until age 65 to become a millionaire.
What about someone who waits 10 years to begin saving? The monthly savings required to reach millionaire status more than doubles, to $625 per month.
Educate Themselves about Investing. Compared to other generations, Millennials are the least knowledgeable about money, according to a PwC report. Their financial literacy is particularly weak around complex investment topics such as inflation and risk.
Getting smart about investing can help millennials in another way: they should become more comfortable with risk. Bankrate reported that only one in three Millennials are invested in stocks. Many are avoiding the stock market out of fear of a crash, similar to the 2007-2008 financial crisis. Understanding more about the connection between risk and return could help them get more comfortable with investing for growth through stocks.
Pay More Attention to Their Investments. In the Transamerica survey, one-quarter of Millennials said they weren’t sure how their retirement savings were invested. They also reported higher allocations to bonds, money market funds and other stable investments than their Baby Boomer and Generation X counterparts.
Millennials are looking at a different set of hurdles than previous generations, but their goals are much the same–security and comfort for their financial future. The steps they plan to take to overcome these hurdles and reach their goals will likely be as unique as they are among older generations.