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Retirement planning: Millennials are starting fast

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Millennials are at the perfect age to take a few simple steps that will eventually give them financial freedom in their retirement years. While that may seem far away, it’s simply good financial smarts to set aside money today for financial security in the decades to come.

Many millennials are already off to a good start, according to the 17th Annual Transamerica Retirement Survey of Workers. “Millennials are the youngest and largest generation in the workforce. They’ve heard the word that they need to save for retirement,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies (TCRS).

Earlier in 2016, Transamerica conducted a 25-minute online survey of 4,161 full-time or part-time workers who are employed by for-profit companies with at least 10 workers. The results provide insight into the retirement issues facing working Americans of all ages.

Let’s focus on what’s working -- and what needs improving -- with respect to millennials’ retirement planning.

What’s working

Almost three-fourths (72 percent) of millennial survey respondents said they’re saving for retirement in an employer-sponsored retirement plan or outside of work. The median amount they’re saving is 7 percent of their annual salaries.

This amount of savings, if consistently contributed in the decades to come, goes a long way toward meeting savings guidelines recently prepared by the Boston College Center for Retirement Research (CRR) in its brief titled “How Much Should People Save?” These guidelines depend on your current age and the age you expect to retire.

For example:

If you start saving at age 25:

  • To retire at age 62: Save 15 percent of pay
  • To retire at age 65: Save 10 percent of pay
  • To retire at age 67: Save 7 percent of pay
  • To retire at age 70: Save 4 percent of pay

 If you start saving at age 35:

  • To retire at age 62: Save 24 percent of pay
  • To retire at age 65: Save 15 percent of pay
  • To retire at age 67: Save 12 percent of pay
  • To retire at age 70: Save 6 percent of pay

To determine whether you’re meeting these guidelines, add both your contributions and any matching contributions made by your employer.

Using CRR’s suggested saving amounts is better than guessing or using your plan’s default contribution rate. It would be even better to prepare your own calculations, reflecting how much you’ve accumulated and the age at which you hope to retire. Many 401(k) providers offer simple retirement calculators that can help.

Millennials also have realistic expectations about retirement ages and their standard of living in retirement. According to the Transamerica survey, almost two-thirds (65 percent) said they’ll work to age 65 or later, and half report that they plan to work in their retirement years. These are realistic perspectives that will help their retirement savings last longer, given our increasing lifespans.

Other good news: Half of all millennials either believe their standard of living will decrease in retirement or aren’t sure what will happen to it. While this might look like bad news, actually it’s realistic to assume your income might decrease in retirement, given general trends with retirement planning. For example, some studies indicate that retirees can still be happy trading off their material standard of living for their retirement freedom.

Interestingly, one-third of millennials think their standard of living will increase in retirement, a number far higher than the percentages reported by Gen X and baby boomers. As millennials age, it’s quite possible that they’ll report more realistic expectations about their standard of living in retirement.

More than half (57 percent) of millennials report they’re staying healthy so they can continue working in their later years. This is a critical action item, given the rising reliance on working later and the increasing cost of medical services. The other 43 percent who don’t report staying healthy would do well to focus on their health as an important retirement planning step.

Compared to boomers and Gen X, millennials are the least likely to report taking out a loan, early withdrawal or hardship withdrawal from their employer-sponsored retirement plan, with just 22 percent reporting one of these actions. Millennials would do well to continue avoiding depleting their retirement savings prematurely.

What needs improvement

Seventy-two percent of millennials report that they don’t know as much as they should about retirement investing. Among those currently participating in a 401(k) or similar employer-sponsored plan, one in four are “not sure” how their retirement savings are invested. Another 22 percent indicated their retirement savings are invested mostly in bonds, money market funds, cash and other stable investments.

Given that retirement is decades away, this suggests they may be investing too conservatively. One simple strategy for millennials could be to invest in a target-date fund, which typically has high allocations to stocks.

Well more than one in three (41 percent) report having less than $5,000 to cover the cost of a major financial setback, such as unemployment, medical bills, car repairs or home repairs. Building such an emergency reserve can help millennials keep their good record of not tapping into their retirement savings.

In summary, millennials can improve their retirement planning by contributing adequate amounts to their retirement savings, investing for the long term and taking care of their health. If they continue these steps in the decades to come, they might do a lot better than their boomer parents, many of whom are struggling with inadequate savings and poor health.

“Millennials are doing a great job of saving for retirement,” said Collinson. “By learning about investments and through careful planning, many can be well-positioned to achieve a comfortable retirement.”

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