Millenials are better savers
A new report just released by Wells Fargo shows that Millennials may be better savers than prior generations. Millennials have demonstrated the biggest gains in the percentage of those participating in their 401(k) plans over the last five years, with an increase of 13.3%.
“This engagement among millennials is encouraging because the sooner they get started, the more prepared they will be for retirement — they have the power of time to help grow their nest egg,”
The early bird…
The earlier you start saving for retirement, the better off you will be. Someone who saves $5,000 a year when they are 22 years old will likely have over $1 million when they reach retirement age (67 years old.)
Conversely, someone who starts saving that same $5,000 when they are 32 years old will likely have just half as much money — about $550 thousand. The difference? Compounding.
Smart cookies or dumb luck?
“This generation is benefitting from legislation that made it easier for employers to automatically enroll employees into their 401(k) plan …”
While Millennials may appear to be smarter, savvier investors, they might be benefiting from automatic enrollment. Legislation has changed. Many companies now automatically sign up new employees for contributions to their 401(k) plan. Years ago, you have to manually opt into the company retirement plan. Today, that frequently happens automatically; if you do not want to participate, you need to opt out.
While I’m not going to assume that it’s all just fortunate timing on their part that Millennials saving more than other generations. Social media and the preponderance of information is likely a contributing factor; the more you know about investing and especially about compounding, the greater the likelihood is that you may become an informed investor, someone who understands that time in the market will allow them to amass wealth.
85% of those automatically enrolled stay in the plan
Conversely, maybe it is simply dumb luck. When this younger age group is automatically enrolled, an astounding 85% of them stay in the plan. In the absence of automatic enrollment, the participation rate falls to paltry 38%. So is it savviness on their part or sluggishness, inertia, and the unwillingness to make any changes? Those statistics seem to suggest that luck may be playing a part here. Speaking of luck, Gen X’s might not have as rosy a retirement future as Millennials.
Is Gen X feeling the squeeze?
Gen X has seen an 11% uptick in participation over the last five years. However, they’re leading the pack in loans from their 401(k) plans: 25% of Gen X participants have a loan, compared to 16% of millennials and 19% of Boomers.
Obviously, it is not a good sign to see that a generation has such a high level of borrowing. Ideally, you would have enough funds available to support your day-to-day lifestyle without having to dip into your retirement funds. That growing pile of cash just sitting there sure has its allure, but you should try to resist the temptation. You want that money to compound and grow for decades, uninterrupted. By pulling money out, you are missing out of several years of compounding.
Who is on track?
For the purposes of setting a goal and tracking progress, Wells Fargo measures the percentage of participants on track to replace 80% of their pay in retirement*, and it appears that many of the behaviors in which millennials take the lead are pointing to a higher percentage on track: 66% of Millennials are on track to reach this goal in retirement, compared to 51% of Gen X and 41% of Boomers.
image credit: Priscilla Du Preez / Unsplash