Young adults facing steeper climb to retirement
Millennials may have to invest a much greater portion of their income to meet their retirement goals, a new study shows.
Try 22 percent of their income, to be exact, according to the NerdWallet analysis.
That figure is based on the assumption that the slower economic growth that has followed the Great Recession will cause average annual stock market returns to fall from 7 percent currently to 5 percent in the future, as some analysts predict.
For example, Martin Small, the head of U.S. iShares for investment management company BlackRock, says in the NerdWallet report:
"The era of supernormal returns is over. Over the longer term, younger investors should expect yields and equity market returns to be low."
To compensate for a 2 percent drop in stock market returns, some millennials would have to increase their retirement savings from 13 percent of their income to 22 percent.
NerdWallet ran the numbers for a 25-year-old who earns $40,000 per year, the median salary for ages 25 to 29, with 2 percent annual income increases until retirement.
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This hypothetical millennial invests in a broad basket of stocks like an index fund or exchange-traded fund that tracks the Standard & Poor's 500 Index. He aims to save enough to replace 80 percent of his annual income at age 67.
If this investor continues to save 13 percent of his income and stock markets continue to return 7 percent, he would save a total of $353,000 and earn $1.33 million in investment returns. In other words, his investment portfolio would be worth $1.69 million when he retires at age 67.
If stock market returns drop to 5 percent, however, this investor would have to save 22 percent of his income to be able to retire with a $1.69 million portfolio at age 67.
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