Why Millennials Still Don't Save Enough

Young unemployed man dressed in blue denim jeans showing empty pockets isolated on white background with copy space.
AR Images/AlamyYoung people have shown an interest in saving, but they're unable to follow through because debt is holding them back.

By Kimberly Palmer

The Great Recession handed millennials a huge lesson about money early in their careers: They saw how quickly the stock market can go south, how hard it can be to land and hold onto a job and how difficult it can be to pursue the American dream when you're drowning in debt. The results of the new 2014 Wells Fargo Millennial Study shows just how far millennials still have to go to achieve a level of financial well-being typically associated with adulthood.

While eight in 10 millennials say the recession taught them the importance of saving for the future, only 55 percent of the 1,639 millennials surveyed have actually started saving for retirement. Those who aren't yet putting money away say they think they will be able to begin doing so at age 35 -- far later than the age financial advisers recommend opening up a retirement savings account.

"They realize that the earlier they start, the more money they'll have," says Karen Wimbish, director of retail retirement at Wells Fargo (WFC). "They won't have pensions, they will probably live longer and Social Security might be a smaller part of their retirement income." But even though they grasp that reality, she says, their financial constrains make it difficult for them to actually get started doing what they know they should.

%VIRTUAL-WSSCourseInline-899%Debt is their biggest albatross. Four in 10 named debt as their top concern, and just as many said they are overwhelmed by it, compared to just 23 percent of baby boomers. Debts eat into a significant amount of monthly income, too, with credit card debt claiming 16 percent of millennials' paychecks, followed by mortgage debt (15 percent); student loan debt (12 percent); auto debt (9 percent); and medical debt (5 percent).

"For some of them, it's absolutely crushing," Wimbish says.

Medical debt, in fact, stands out as a surprising problem for millennials. Despite their youth, many have faced significant amounts of health-related costs, which continue to dog them. Gary Mottola, research director of FINRA Investor Education Foundation, says one in three millennials has unpaid medical debt, compared to 22 percent of baby boomers. Indeed, half of the 6,865 millennials in the 2012 FINRA survey​ worry that they have too much debt. "This is something that's on their minds and pervades their generation," Mottola says.

The Wells Fargo survey also found that it's those debts that are really holding them back. About half of millennials in the survey said more than half of their income goes directly toward paying off debt, and 56 percent said they are living paycheck to paycheck, unable to save for the future. Their top reasons for not saving for retirement include not having enough money to save (84 percent) and having more immediate priorities, like needing to pay off debt (77 percent).

Another problem is that their confidence in the stock market was shaken by the recession, which could hurt them over the long run, if they keep their money in safer spots that earn lower (or no) returns. Among the 1,529 baby boomers in the Wells Fargo survey, 66 percent​ say the stock market is the best place to invest, while just 59 percent of millennials are willing to say the same. Their hesitancy to invest, though, might fade with time, as we move further away from the recession: Last year, just under half of millennials were willing to call the stock market the best place to invest.

Even those who are invested in the stock marked tend to be putting their money in overly conservative spots, given their age and long time horizon. A significant number of millennials -- 30 percent -- say they have​ a quarter or less of their investments in stocks or mutual funds.

%VIRTUAL-article-sponsoredlinks%Pat​ Pearsall-Ramey​, a financial planning manager at Ernst & Young, says millennials are simply too inexperienced to know what to do with their money. "They don't know how to make investment decisions. They are new to being investors, and they overreact," she says. They might watch the news and see a worrisome story and sell their stocks, for example, whereas a more experienced investor would know that it's usually best to hold shares (within a diversified portfolio) over longer periods.

Still, as previous studies have found, Gen Yers' optimism remains strong, according to the Wells Fargo study. ​Seven in 10 said they are better off financially than their peers, which, statistically, cannot actually be true.​ A similar percentage said they expect their standard of living to exceed their parents by the time they reach retirement age. A whopping 78 percent said they are confident they could find a new, similar job within a year if they were to lose their current one. (Among baby boomers, only 58 percent said they same.)

Gen Yers' best advice to others, according to Wells Fargo, is exactly what they should be following themselves, even if they currently find themselves unable to do so: Don't spend more than you earn, get educated about your personal finances and start saving for retirement now. As they've already discovered, it's easier said than done.

Despite that reality, though, millennials are actually more satisfied with their finances than Gen Xers, a fact that Mottola attributes to ​ their financial expectations being shaped by the recession. In other words, he thinks they have lower standards.

Still, those deciding whether to pull out the plastic for another purchase or ramp up their 401(k) contribution instead might want to heed the warning of Mary Beth Franklin​, a financial industry and retirement expert: "If you save 3 percent [of your income], retirement will be a lot like college. You'll eat a lot of ramen noodles, but you won't look as cute doing it."

Kimberly Palmer is a senior editor for U.S. News Money. She is the author of the new book, "The Economy of You." You can follow her on Twitter @alphaconsumer, circle her on Google Plus or email her at kpalmer@usnews.com.

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