On November 1, Jean Chatzky, financial editor for The Today Show, posted a tweet about retirement saving goals. She wrote, “By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x.” The tweet struck a chord with me because as a near-30-millennial, I’m admittedly insecure about my retirement savings. At the moment I have $3,876 in my retirement savings account, which is 12% of my current annual salary. By the time I’m 30, if I keep saving the way I have, I’ll have managed to put away 50% of my annual income. According to Jean’s goals, I’m very behind in my savings. Turns out I’m far from alone.
Wells Fargo Investment Institute’s generational research report found that 41% of Americans aged 17 to 35 haven’t started saving for retirement. There are several factors at play here.
First, there’s the issue of underemployment. The underemployment rate for those aged 22 to 27 was 44% back in 2012, according to an analysis of Bureau of Labor Statistics Labor Force Statistics. If you need a refresher on underemployment, someone that’s underemployed is involuntarily working part time or is overqualified for their current position. With millennials taking longer to find a “good” job that pays a living wage and offers benefits like retirement savings and employer match, it’s no wonder more aren’t putting their money toward retirement. I didn’t get a “good” job with an option for retirement savings and employer matching until I was 26. Up until then, I was making $18,000 a year working retail and that’s financial time I’ll never get back. In a perfect world, if I’d been able to secure a position right after graduation, I’d be on track to meeting Chatzky’s seemingly unrealistic goals.
Another factor wreaking havoc on millennials finances? Student debt. Some pieces of retirement savings advice for those in their 20’s recommend putting as much as 25% of their income toward retirement to take full advantage of compound interest. The logic is sound but the math doesn’t add up.
Let’s consider a worker with a salary of $35,000 and $37,000 in debt, the average for a graduate in 2016 . With an interest rate of 5.7%, the monthly payment for paying this debt off in 10 years would be $450 . After taxes ( calculated using Pennsylvania for this example, assuming two exemptions and a single filing status ) they’ll take home about $2,241 a month. Let’s wager living expenses and groceries cost them $1,500 a month. That leaves $740. Healthcare often isn’t free, so let’s take out $100 a month for health insurance. They’re down to $640. That student loan payment of $450 brings them to $190 to put toward retirement, or 8.5% of their income. This doesn’t leave any room for things like an emergency savings account, owning or leasing a car, saving for a trip or attending a wedding, or saving for a downpayment on a home. Switching to an income-based repayment plan may lessen the student loan debt month to month, but at the same time lengthens the life of the loan and subsequently increases the amount of interest accruing each and every month and ultimately, the amount they’ll pay over time.
Not only do millennials have higher rates of underemployment and more student loan debt than previous generations, but they “earn 20% less than Boomers did at the same stage of life, despite being better educated, according to a new analysis of Federal Reserve data by the advocacy group Young Invincibles.” Saving 25% of your income may have been doable for Baby Boomers who were making more money and had less debt, but that’s not so for today’s college graduates.Antiquated advice ultimately shames today’s young workers into feeling inadequate and unprepared for their later lives.
The good news is that there’s no one rule to saving for retirement. Many pieces of retirement savings advice make great sound bites or tweets but they aren’t practical. As the average millennial worker exampled above demonstrates, it can be nearly impossible to put money aside when you’re barely making enough to cover all of your bases. By the time most of your money goes out on bills, loans and staying alive, it can feel like highway robbery to put everything that’s left where you can’t touch it.
If it feels like you’ll work until you’re dead because #whatisretirement? In my next piece I’ll tell you how I got over my money baggage and started getting serious about saving on my very modest salary.