Are Millennials Better Prepared for Retirement Than Baby Boomers and Generation X?
Transcript of Podcast Episode 254
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, are millennials better prepared for retirement than Baby Boomers and Generation X?
A new survey by The Vanguard Group, the mutual fund giant based in Malvern, PA, has concluded that, “For most income cohorts, millennials and Generation X enjoy a brighter retirement outlook than boomers.”[1] How is this even possible?
This certainly runs contrary to many popular narratives, especially when it comes to Millennials. “Millennials are still significantly behind in amassing wealth,” NPR claimed in a 2021 Planet Money newsletter.[2] And, according to a recent article in The Atlantic, “The once-optimistic children of the 1980s and early ’90s are now wheezing under the burden of college debt, too poor to buy houses or start families, sucker punched by a hostile economy.”[3] Could all these experts be wrong?
The Vanguard study looked at what they call the “sustainable replacement rate by generation and income,” in other words, the projected highest level of consumption one can maintain in retirement as a percentage of their pre-retirement income.
The study compared early Millennials (ages 37 to 41) to Generation X (ages 49 to 53) and late Baby Boomers (ages 61 to 65).
It’s perhaps no surprise that for lower income people, defined as a median income of $22,000, the replacement rate is low across the board. This makes sense: the lower your income, the less likely you are to have something left over to save for retirement. But at higher income levels, the millennial advantage becomes clear: for a median income of $70,000, the replacement rate is 66 percent for millennials, compared to 53 percent for Gen X and 51 percent for Boomers. It became even more pronounced when they looked at the 95th percentile: 85 percent for millennials, 75 percent for Gen X, and 63 percent for Boomers.
So, what could possibly explain all this? Perhaps it’s the changes to 401(k) enrollment policies that have taken place over the last few years. Nowadays, contribution to a 401(k) is the default option for most new employees. A portion of their paycheck will automatically go into their 401(k) unless they opt out.
A 401(k) is far from the perfect retirement plan, and there are other options that may be better for some people. For one thing, the money is 100 percent taxable when it comes out. For another, it is perhaps too easy to treat your 401(k) like an emergency fund and withdraw some or all of the money prematurely.
Still, for many Americans, it represents the only real savings they have. This is because the money appears in the account before they get the chance to spend it.
Could it be that millennials are being unfairly maligned for their lack of financial savvy? Sure seems that way.
[1] Fu Tan, Fiona Greig, Andrew S. Clarke, Kevin Khang, Kate McKinnon, and Victoria Zhang. “Retirement Outlook: A national perspective on retirement readiness.’’ Vanguard Research. https://corporate.vanguard.com/content/dam/corp/research/pdf/the_vanguard_retirement_outlook.pdf (accessed October 12, 2023).
[2] Rosalsky, Greg.. “There Is Growing Segregation In Millennial Wealth.” Planet Money, National Public Radio. https://www.npr.org/sections/money/2021/04/27/990770599/there-is-growing-segregation-in-millennial-wealth (Accessed October 13, 2023).
[3] Twenge, Jean M. “The Myth of the Broke Millennial.” The Atlantic Magazine. https://www.theatlantic.com/magazine/archive/2023/05/millennial-generation-financial-issues-income-homeowners/673485/ (accessed October 13, 2023).
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