Name: Millennials Are on Track to Surpass Boomers in Retirement Savings
Uploaded: 2023-10-26T21:25:00Z
Duration: 8 min 30 s
Description: New data from Vanguard suggests millennials are poised to move ahead of older generations in terms of saving for retirement. WSJ personal-finance reporter Anne Tergesen joins host J.R. Whalen to discuss what’s allowed them to boost their nest eggs. Photo: iStock

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New data from Vanguard suggests millennials are poised to move ahead of older generations in terms of saving for retirement. WSJ personal-finance reporter Anne Tergesen joins host J.R. Whalen to discuss what’s allowed them to boost their nest eggs. Photo: iStock

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Millennials Are on Track to Surpass Boomers in Retirement Savings

Here's "Your Money Briefing" for Thursday, October 26th. I'm JR Whalen for the "Wall Street Journal." Millennials are on a better track for retirement savings than baby boomers and Gen X, according to new data from Vanguard. "Wall Street Journal" personal finance reporter Anne Tergesen joins me. So Anne, millennials or those born in the 1980s and the '90s have lagged behind prior generations in key areas of personal finance. Why is that?

Anne: It's well documented that they've lagged on key measures like home ownership and earnings, and there are a couple reasons for that. One is that many millennials came into the job market during turbulent times, during the great financial crisis and the aftermath of that. So they got off to a more difficult start in the job market. Millennials also have a lot of student debt compared to prior generations, so that has really hobbled their ability to accumulate wealth at the same pace as prior generations.

JR: What's allowed them to move ahead in terms of retirement savings?

Anne: What's allowed them to move ahead is actually something called automatic enrollment in 401k plans. 401k plans have over the past say 10 to 15 years, a large number of them have adopted what's called automatic enrollment, especially like the larger plans from large companies. The way that works is, it's just what it sounds like that when new hires join a company, rather than waiting for them to get around to signing up for the 401k plan, the employer just automatically puts them in the plan and they can feel free to opt out if they want. They're basically saving as a default rather than they have to proactively elect to save.

JR: How does that compare to older generations?

Anne: So the baby boomers came of age when the 401k was very new, and at that point there was no such thing as automatic enrollment. It was entirely left up to them to decide whether to save and when to save, and a lot of them got off to late starts when it came to enrolling in 401ks. And Gen X is in between, but basically a lot of them were left on their own to make these decisions as well. And so that's really reflected in the retirement savings that each generation has been able to amass.

JR: So what does this mean for the average millennial in terms of how prepared they'll be when it comes to retire?

Anne: So the Vanguard data shows that for a millennial earning the average or like the median salary in the middle of the income spectrum, that they are on track to replace about 60% of their pre-retirement income with both social security and savings from 401ks and IRAs. And in contrast with the baby boomers, they're only on track to replace 50% of their pre-retirement income. So you can see that millennials are doing considerably better in that area.

JR: So does that mean that millennials who have automatically been enrolled are on track to have a retirement cushion?

Anne: If you've been automatically enrolled, you have some savings. It doesn't mean that the savings that you have are adequate. And that's been one criticism of automatic enrollment is that often companies automatically enroll people at 3% of pay, which is not enough. A lot of financial advisors recommend saving 12 to 15% of pay. Companies that automatically enroll, a lot of them have implemented something called automatic increase. So every year that goes by, they automatically increase your savings rate by, typically, one percentage point, which over time can get you to that 12 to 15%. But it doesn't mean that you have an adequate savings cushion because ideally you start off at 12 to 15% and that's what you save every year. Particularly millennials who are in the lower end of the earning spectrum, they tend to not have an adequate amount of savings for what they're projected to need in retirement, but the higher earners are on track to, potentially, have enough.

JR: In your story, you mentioned the Vanguard data focused in on millennials making around $61,000 a year. How does that relate to them being able to meet their needs in retirement?

Anne: They looked at four different levels of income and the question they asked was, "Are people who are millennials, and also baby boomers and Gen Xers, but people who earn this amount, are they on track?" And what they found is that when it came to Gen X and the baby boomers, many of whom are still in the workforce, are they on track? The income groups that were on track for all three generations were very high earners, in the 95th percentile. But interestingly enough, when they looked at the 70th percentile of earners, so those who earn an above average amount, but not the top 5%, they found that among those earners, the millennials were on track. Whereas the baby boomers and Gen Xers in that income percentile were not on track. So basically what that's showing is that as you move down the earning spectrum, the millennials are faring better. It doesn't mean that at every level of the earning spectrum millennials are saving an adequate amount, but if you're in the 70th percentile or better and you're a millennial, this data is showing that on average those people are saving at an adequate amount to have what they're projected to need in retirement.

JR: And this automatic enrollment does put them ahead of the game. They do have the option to opt out of it, right?

Anne: Yes, they do. But interestingly, when people are automatically enrolled, the percentages that opt out are quite low. So it just shows you that when people are automatically enrolled, then it becomes incumbent upon them to do something to get themselves out of the plan. Not so many people decide to actually take action.

JR: If someone's employer has enrolled them in a retirement plan, what can they do today to be sure they're maximizing their savings?

Anne: So most financial advisors recommend saving between 12% and 15% of your income per year. That includes an employer match. To be on the safe side, targeting a savings rate of 15% of your income a year over a 30-year career is what's recommended. And again, that includes the employer match. So if your employer gives you a match that's worth 3% of pay, then you contribute 12%. So that's what people can do to try to ensure that they have enough.

JR: Should people explore other retirement savings tools in addition to 401k?

Anne: So people should always start with a 401k, especially if their company offers a matching contribution because that's basically free money. So to start with your 401k and if you feel that the plan doesn't offer you great options, maybe it charges, the fees are high or something, you can always try to save in an IRA as well on your own. But the beauty of the 401k is that once you're in it, you don't have to do anything. So if you're automatically enrolled, you're just in the plan, you don't have to make decisions, especially if your plan has automatic escalation. You go in at maybe 3% of pay. If you wanna be proactive, you increase that rate yourself, otherwise your company is gonna increase it every year for you. Whereas to save in an IRA, it means that you have to take actions.

JR: And if somebody's at a job that doesn't offer a retirement plan, how can they open one up?

Anne: If you're an employee at a company that does not offer a 401k, you can open an IRA. And now, unfortunately, the contributions are significantly lower with an IRA, they're about $6,500 a year for people who are under 50, about $7,500 a year for people who are 50 and older. In contrast, with the 401k you can save on a pretax basis or a Roth basis up to 22,500 a year. So you can see there's substantially different contribution limits there. But if you aren't offered a 401k, you can go and open an IRA.

JR: That's "Wall Street Journal" reporter Anne Tergesen. And that's it for "Your Money Briefing." We'll be back tomorrow morning with WSJ reporter Ashlea Ebeling to discuss why your will is not always the last word on who gets your assets. This episode was produced by Zoe Culkin with supervising producer Melony Roy. I'm JR Whalen for the "Wall Street Journal." We'll be back tomorrow morning. Thanks for listening.

WSJ's Your Money Briefing podcast is your personal-finance and career checklist. Finance reporters and experts break down complicated money questions every weekday to help you make better decisions about managing your money. 

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