Everyone wants to know exactly how much to save for retirement so they can just set it and forget it. JPMorgan Chase (JPM) has tried to figure that out for Millennials – the generation born between 1982 and 2004. In The Millennials: Now Streaming the Millennial Journey From Saving to Retirement, the full-service bank looked to answer the question, taking into account how life, the market and the government may impact any planning.
Here is a rundown of the numbers J.P. Morgan came up with and a look at three of the most common problems Millennials planning for retirement are likely to encounter. (For more, see: A Financial Advisor's Guide to Millennial Clients.)
How Much to Save
For this study, J.P. Morgan found that if a Millennial started saving at the age of 25, he or she will need to save the following to be able to retire at age 67 and meet retirement income targets:
- Those earning a median income will need to save 4% to 9% pre-tax.
- Those earning an income in the affluent category will need to save between 9% and 14% pre-tax.
- Those who are considered high net worth will need to save between 14% and 18% pre-tax.
“Affluent and high net worth Millennials will need to save much more than median income earners due to higher taxes and the fact that they put less of their total income into Social Security every year," notes Mark Hebner, founder and president of Index Fund Advisors, Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” "These combined effects means that they must rely more on their own savings to be able to fund their standard of living in retirement."
In addition to the pre-tax savings listed above, the study suggested Millennials will need to sock away 2% of their income after tax and, if they have an employer-sponsored retirement plan, have an employer match of 50% up to 3% of their wages – and suddenly a straightforward answer becomes more confusing.
Many things can affect how much they can put away and how much they end up with in retirement. The following three factors could likely necessitate the need to save even more than the estimates above.
Access to Retirement Plans
Only 51% of employees have access to retirement plans. This can have a big impact on how much you can save in a tax-advantaged account. The less you can invest in a company retirement account such as a 401(k) plan, the more you will have to save overall.
If you have a 401(k), for example, you can contribute to $18,500 in 2018 as a tax deferred benefit. If you do not have access to a 401(k) plan and need to use an IRA, you are capped at saving $5,500 a year in a tax-deferred account. (For related reading, see: Retirement Planning the Millennial Way.)
This means that more will have to go to a taxable savings account, thus decreasing your account's compounding effect, as you have to pay taxes on any interest income or capital gains. Plus, you miss out on the assumed employer match in the above calculations, so you will have to save that percentage on your own also.
Having the right allocation in stocks and bonds can make a big difference in how much your portfolio will return over the years. If that allocation is too low on stocks, you will not reach your goals.
Unfortunately, surveys show that the average person between the ages of 21 and 36 has 52% of his or her savings in cash. You simply cannot accumulate the money you need to retire without more exposure to equities. Inflation alone will destroy your dollars' purchase power if your investments lack appreciation potential. So if moving to add more stocks to your portfolio is just too stressful, you will have to find a way to drastically increase your savings.
While computers and the web have made things in general really easy, they do come with some drawbacks. During your lifetime, the chances of your job being replaced by automation has increased. Additionally, because of widespread internet access, there is increased competition from foreign workers who can do your job remotely – and likely for a lot less than what you get paid. The need for full-time staff is lessened, as well.
With these two factors in place, the chances of being out of work increase as corporations look to cut costs. When you are unemployed, you lose time and funds to save in a retirement account and get an employer match. You also risk needing to withdraw retirement savings to keep yourself afloat. That's another reason Why You Absolutely Need an Emergency Fund.
The Bottom Line
There are plenty of reasons Why Millennials Are Stressing About Saving for Retirement. The best way to deal with all of them is to save as much as you can. A good goal is to save at least 15% to 20% of your gross income to ensure that you get to live the life you want after you bid the workplace adieu.