Currently the young workers can’t even dream of retiring at the age of 40-50 years. Prospect of weak investment returns and extended mortality rates probably mean that millennials will require saving money as compared to their parents. The sooner they start saving, the easier it will be for them to accumulate nest egg. Yet, what the millennials think is that it’s tough to sacrifice their present for something that will only happen until the 2060s.
Retirement is the biggest priority for the millennials; at least they say so when they’re asked. As per a recent survey, retirement was by far the top most concern of all age groups. Millennials even give higher priority to saving for retirement, much ahead of saving for student loans, job security and credit card debt.
If millennials are so worried, why don’t they do something about it?
Yes, this is the million-dollar question which arises after seeing the way in which millennials simply waste their time in doing nothing about saving for retirement. Do they need a hard nudge to make the best financial decisions? Millennials don’t seem to be seriously thinking about retirement. There are numerous companies which run 401(k) style plans for around 1.9 million people. But when it comes to getting started, filling out all the documents to enroll yourself in a retirement plan of your employer becomes a big obstacle. It is indeed shocking enough to see that when the employees are left to their own, only 30% of the young adults end up signing themselves for 401(k)s.
There are many companies which have automatically signed up workers for their 401(k)s. Employees are allowed to deny participating but the main idea is that very few of them will even bother about saving money. Among the workers aged between 20-something, 85% of them go with being auto-enrolled in a retirement plan. Young workers contribute a very small percentage of their salaries to their workplace retirement funds. This is a good sign as workers who save early don’t require saving as much as their older workers. Young workers typically pay less than their elders and usually have a tough time in finding money that they can put away.
Are some millennials taking smarter decisions than the old savers?
There are some areas in which millennials are taking smarter steps than their older counterparts. For instance, workers under the age of 40 are more likely using Roth IRA and Roth 401(k) accounts, as per recent survey. Roth accounts take away after-tax money and hence they don’t offer similar immediate tax break as conventional accounts which take away pre-tax money. Investment profits in a Roth aren’t usually taxed and on the other hand, retirees need to pay income taxes when they withdraw money from their 401(k) accounts.
Only 7.7% of all contributions from workers went to Roth accounts in 2015 but that figure is up by 45% within just 2 years. Employees in their 20s make 8.2% of contribution to Roth options. Moreover millennials are less likely to raid their 401(k) accounts as they have different other kinds of savings as well. Workers above the age of 40 have taken out more 401(k) loans and young workers borrow less often.
The younger workers are usually more lured to cash out their 401(k) balances when they switch from one job to another. Although early withdrawals are attached with a 10% penalty, yet they feel like withdrawing money. However, now it is seen that more and more workers go through the obstacles of rolling balances into new 401(k)s and IRAs. The share of 20-something participants who cash out their 401(k) is already down by 10% since the last 2 years.
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