Millennials Think They Can’t Save $1 Million. They’re Wrong
It is easier than you imagine. It’s also not enough.
“Six in 10 working millennials (those ages 22 to 35) have begun saving for retirement …. That’s an impressive rate given other research that shows Gen X started saving at a median age of 27 and boomers, 35. By comparison, millennials began saving at age 22. So they are ahead of the game.
Millennials aren’t doing everything right: They often leave too much money in cash. But target-date funds and other managed accounts that are default investments in company 401(k) plans are changing that and steering their investments in a good direction. Some 85% of millennials use managed accounts, compared to 73% of boomers, Wells Fargo found. …
… 64% of millennials say $1 million is out of reach, Wells Fargo found. As you might expect, there is far more optimism among millennials with high paying jobs: Those who say they will not hit the $1 million mark have median annual income of $27,900. Those who say they will hit the $1 million mark have median annual income of $53,000. Half of those who do not expect to hit the mark have begun saving, while three-quarters of those who expect to hit the mark have begun saving. …
Getting to $1 million for a young person isn’t the chore you might imagine. Consider a simple scenario: These hypothetical millennials start their career at $32,000 a year and receive 2% pay raises every year. They start by saving 5% of pay but increase savings by two percentage points each year until they are saving 13% of pay. They earn a 7% annual average return. At age 65, such savers would have $1.2 million.
The problem is that $1 million 40 years from now will hardly qualify as rich. If inflation averages 3% a year, that $1 million will have the same spending power as $306,000 today. Even if we get 40 years of 2% inflation—unlikely, but closer to what we’ve seen lately—that nest egg will be worth just $453,000 in today’s dollars. Not terrible. But not wealthy. At today’s annuity rates, that sum would buy less than $2,500 of monthly income for life. …
Max out your 401(k). Open a Roth IRA. Dedicate more of your pay raise to savings. After retiring a debt, don’t spend the monthly savings—save it.
Millennials will collect Social Security benefits of $2,000 to $3,000 a month in their late 60s. They need to save enough to generate $3,000 to $4,000 of additional income …. The later you start, the more difficult that becomes. Beginning to save at age 32 would generate just half the nest egg as starting at age 23, Wells Fargo estimates.”