If you're part of the generation born between the early 1980s and early 2000s, this is depressing. But there are lessons to take heart from.
I thought NerdWallet’s retirement expectations for millennials were gloomy. Personal Capital’s didn’t make me feel any better.
NerdWallet’s analysis concluded that the average member of Generation Y will retire at age 73. Personal Capital says it’s possible for millennials — who account for a quarter of the population — to retire at 65. That is, if they have $1.6 million (in 2013 dollars) in the bank. Or they can retire at 75 with just a million.
Of course, Personal Capital makes a lot of assumptions and freely admits its analysis could be blown up, for better or worse, by any number of unpredictable factors. So let’s unpack a few of its ideas:
- The hypothetical millennials its numbers are based on are a 30-year-old married couple with $20,000 saved already and a savings rate of $5,000 per year.
- They hope to spend $100,000 a year in retirement. (Sounds nice.)
- They expect $40,000 in yearly Social Security benefits.
- Personal Capital assumes their investments, prior to retirement, will grow 6 percent per year after accounting for inflation.
In this scenario, it takes the couple until they are 68 to save $1 million, but that’s not enough. “Our 30-year-olds would run out of money by the time they reach 84 (before their life expectancy of 86 and 89, respectively, for him and her),” Personal Capital says. If they retired at 65, they would be out of money by age 80.
The easiest fix here is to reduce the $100,000 a year they plan to spend. “You can move away from this notion of ‘depleting’ your portfolio if you set a target spend level that is lower than the yield on your portfolio,” Personal Capital says. “Spending less than you make is not a bad rule of thumb.”
Real estate and other investments could also make things go better. And, of course, we have a lot of other ideas.
You may or may not agree that Personal Capital’s scenario is realistic, but the takeaways seem reasonable:
- Save early and as much as you can afford to. Half of young adults don’t save at all, mainly because of debt.
- Postpone retirement if you’re healthy enough to keep working. You make more money and get more Social Security, and there are mental health benefits.
- Set reasonable financial expectations. The sooner in life you learn to live within your means, the better retirement’s going to be.
And either way, hopefully it can scare some people into action. Got other retirement advice for millennials? Comment below or on our Facebook page.