Millennial ANGST
HOW LOW RATES ARE PLACING AN IMPOSSIBLE SAVINGS BURDEN ON NEXT GENERATION.
Chronically low interest rates have been a scourge for older folk saving for retirement. But, coupled with falling equity returns, there may be an even bigger problem for millennials wanting to retire. A new study by San Franciscobased personal finance website NerdWallet warns that just to retire by age 70, today’s millennials would have to save a whopping 22 per cent of yearly income.
That’s a depressing finding when you consider that most retirement experts have recommended saving just 15 per cent of annual income. Now if millennials could earn the seven- percent average annual return stocks have generated historically ( since 1950), they could achieve the common goal of replacing 80 per cent of working income by age 67, merely by saving 13 per cent of annual income. That assumes a 25-year-old earning $ 40,000, which is the median average salary for those in their late 20s.
Unfortunately, if pessimistic predictions pan out that the U. S. economy will generate slower growth going forward, then stock- market returns of only five per cent a year would bring about the gloomier scenario. Indeed, one expert — Margin Small, head of US iShares for BlackRock — told NerdWallet that “the era of super- normal returns is over. Over the longer term, younger investors should expect yields and equity- market returns to be low.”
NerdWallet urges millennials to start saving now and to put aside as much as possible. That’s not a huge ask: One survey by Transamerica Center for Retirement found 72 per cent of millennials are already saving for retirement, and 30 per cent are saving a respectable 10 per cent of income.
As always, what counts is time in the market and resisting the urge to procrastinate. NerdWallet found that if a 25- year- old puts saving off until the age of 35, he or she would have to save a “nearly impossible” 34 per cent of income every year ($16,400 on average), to retire at 67 with 80 per cent of the income they earned in their working years. Again, that assumes the more pessimistic future stock returns of five per cent rather than seven per cent.
Time may be on the millennials’ side, but when they do save, they’re going to have to make sure their money gets a decent return. That means not just saving in lowyielding savings accounts, but properly investing it in growth- oriented equity funds. And when they do, they should pay attention to investment costs. NerdWall et says exchange- traded funds ( ETFs) provide both low fees and offer quick and easy diversification. NerdWallet found that compared to higher- fee vehicles like mutual funds, millennials could save hundreds of thousands of dollars just by using ETFs over a lifetime.
It also mentions roboadvisers, most of which also use ETFs, but package them up in convenient set-it- andforget packages, typically at 0.5 per cent a year on top of the ETF fees.
LOWER STOCK RETURNS BRING ABOUT A GLOOMIER SCENARIO.