Most millennials in the United States are not on track when it comes to their retirement savings. In fact, research from the National Institute on Retirement Security indicates that 66 percent of millennials have nothing saved for retirement at all.
Many have attributed the problem due to overspending, fiscal irresponsibility, and a lack of financial literacy among millennials. But the reasons millennials aren’t saving for retirement are more nuanced.
Stagnating Wages With Too Many Fiscal Responsibilities
For most millennials paying bills, paying off student loan debt takes precedence. Since entry-level wages have stagnated, there isn’t much left over to put into retirement savings after basic expenses are taken care of.
“I see in practice that a lot of us are putting retirement down the goal priority list, in favor of paying off student debt or buying homes,” Douglas Boneparth, a certified financial planner and author of The Millennial Money Fix told CNN.
But waiting can have significant consequences, and by putting off saving for retirement, millennials are missing out on compound interest.
“If you are saving using a retirement fund, like a 401K or an IRA, once you’ve put money into it, that money begins to gather interest,” notes Ben Allen, a financial expert at Fiscal Tiger. “Then, that interest is added to your account principal, and your new (larger) principal amount gains interest again. In other words, the interest helps you earn money even if you don’t continue to save. Basically, the money grows at an accelerated rate. The longer you let the money sit and grow, the more interest you’ll earn.”
In essence, the sooner you start saving, the sooner you’ll be able to retire.
Many Millennials Can’t Participate in Employer-Sponsored 401(k)
66 percent of millennials work for a company that offers some kind of 401(k) retirement program. 94 percent of those who are eligible to contribute do. But for a majority of millennials, their employer bars them from contributing because of how their employment is structured.
The Employee Retirement Income Security Act of 1974 allows employers to restrict participation in their 401(k) plans to employees who have worked at the establishment for at least one year. They can also place restrictions that ensure that employees that work under 1,000 hours per year (19 hours per week) will not be eligible. In many cases, new and part-time employees are excluded.
This means a lot of young people are excluded from joining a retirement plan. According to the NIRS report, 25 percent of millennials are employed part time, and 50 percent have been working at their place of employment for less than a year.
In many cases, this puts the brunt of responsibility on employees to come up with their own solutions. As Robert Westley of Intuit notes, “A greater emphasis is placed on employees to save at levels that are sufficient enough to maintain an optimal lifestyle in retirement.”
What Can Be Done to Combat This Issue?
Millennials have a few options when it comes to saving for retirement. One is to find a job with 401(k) benefits or stay at their company for the required amount of time. Another is to set up and fund a retirement account on their own. Though they’re not as simple as employer-sponsored accounts, an individual retirement arrangement (IRA) is often much more beneficial. Should you choose to take this route, it’s important to be realistic about what you can and cannot afford, budget appropriately and put away as much as you can to make up for any lost time you may have.
In order to set yourself up for a successful retirement, it’s important that you plan ahead for the future. In the words of Warren Buffet, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”