3 Retirement Problems, Solutions Millennials Face Today
It's no secret that millennials have had a tough time getting started with careers, families and saving for retirement.
Everything from the Great Recession, to the rising cost of higher education, to the increasing scarcity of better-paying jobs has taken its toll on people born in the last two decades of the 20th century.
And while retirement may be three to four decades away for even the oldest of this bunch, there are some very real problems that they will face if they don't take action soon. Let's look at three:
1. Long-term impact of student loan debt. Getting into the college of their choice and earning a degree is just the first step for many. In 2015, the average college graduate walked off the stage not only with a diploma in hand, but with about $35,000 in loans they'll need to repay, according to a report in The Wall Street Journal. What this does is hamstring them with not being able to save as early or as much for retirement. With that, they won't benefit from one of the greatest advantages they have: time. By starting later, they lose the benefit of compounding interest, and no investor wants that.
2. Low wages. Workers entering the labor force are experiencing not only lower wages due to stagnation, which has been reported by various institutions such as the Pew Research Center, but they also can expect to see low wages throughout the first decade or more of their careers.
3. Poor benefits. Benefit packages aren't what they once were, and that could be a contributing factor to the projected retirement age for millennials. Some have hypothesized that they will continue working into their early to mid-70s, which is up from a current average retirement age of 62. Baby boomers and Generation X had the benefit of pensions, and at this point very few companies are offering them unless you work for the government (and who knows, those may even be in jeopardy in the next few decades). And while no one can be 100 percent sure what to expect from Social Security, it might be a good idea to not expect to have these payments be the sole source of your income.
While it may seem pretty bleak on the surface, there are actions that can be taken to combat these problems in order to keep an enjoyable retirement a reality. Here are three:
1. Save earlier. This may seem like a solution that is extremely challenging (or even impossible) given student loan responsibilities. But even putting away just $20 to $50 a month in your early 20s can grow over time. This gives you the ability to take advantage of our friend, compounding interest, and get into the habit of saving on a regular basis. If you wait until your late 30s when your loans are paid off and you feel you can save more monthly, you may be surprised at how much more you'll need to put away in order to catch up. For example, starting at 20 and saving $50 a month at 6 percent interest will yield about $135,000 by the time you reach 65. If you waited until you're 40 to try to reach that $135,000 mark, you'd need to save almost $200 a month at the same interest rate. (Another way to look at it is an outlay of $27,000 in principle with the $50 plan earlier versus $60,000 if you went the $200 route later.)
2. Adjust living standards. This is one that folks don't like to hear. "Retirement is 40 years away, why can't I take a trip to Rome and Barcelona now?" It's true that your full-time working days may be ahead of you for a while. But just because that's the case doesn't mean you need to spend like you'll be making money forever. By looking realistically at income and expenses, and what savings goals you have, you'll be in better shape down the road to have money set aside for these types of trips.
3. Continue to work longer. I'm not advocating continuing to put in 80-hour weeks when you'd rather be playing with your grandkids. But this generation, more than any in history, will be able to take advantage well into their golden years of how the economy is changing. Our economy used to be based off factory work and most employees needing to be physically fit. But once you reached a certain age, (for most in their 50s) you were no longer fit for that type of work and retired shortly after. Our current economy has shifted to a knowledge-based or connection-based economy, and we are seeing people now work well into their 70s, 80s and beyond. By keeping your mind sharp you're going to be in a better position to continue to earn as long as you'd like. For example, if your line of work is in management, coming on as a part-time consultant with a local firm can help offset some unexpected costs, or even allow you to take those trips you thought were once out of reach.
Greg Ostrowski is a blogger for The Smarter Investor. Greg is a certified financial planner and managing partner of Scarborough Capital Management, offering low-cost, flat-fee 401(k) management and wealth management to individuals across America -- from millennials to retirees. You can follow him on Twitter at @gostro01 or connect on LinkedIn.