4 ways planning for retirement could be different for millennials
Millennials are the generation born from the early 1980s through the mid-1990s. The oldest members of this generation will begin to retire around 2045, roughly 30 years from now. In many ways, millennials are savvier about retirement savings than their parents. According to TD Ameritrade’s Next Generation Research report, millennials are more likely to have a budget and are more flexible about when they plan to retire.
Even though millennials may be more informed about the need to plan for retirement, saving strategies for this stage in their life may be different compared to previous generations. So how might retirement look different in 30 years? Let’s look at a few of these changing areas:
Millennials may live longer: Current U.S. life expectancy is about 78 years. However, millennials could live to be as old as 100 as medical technology advances. This means millennials will need more money saved to finance a longer retirement. Right now, the average retired household spends $41,403 per year for Americans over 65 according to the Bureau of Labor Statistics. So for example, if someone is retired for 13 years, he or she would need $525,000. Millennials could end up being retired for twice that time, meaning they may need twice the money.
Inflation could rise… perhaps dramatically: Average annual inflation in the United States over the last 100 years is 3.3 percent. It’s possible that inflation could rise sharply immediately prior to millennials retiring, as it has in past years like 2006 or 1979. Millennials should review their retirement plans to ensure they will have enough saved should there be a spike, or even consistent, increase in inflation. A financial advisor will be able to assist in planning for this as well.
Lack of wealth accumulation from home ownership: Right now, many retirees are able to sell their homes before retirement, bolstering their savings while also downsizing into less expensive homes. Many millennials have found themselves priced out of the market because of many factors, including outstanding student loan debt and more expensive housing, which makes it harder to save up for a down payment. In 2016, the home ownership rate dropped to its lowest rate since 1965. While this may not seem to have an immediate impact on millennials retirement, in the long run, it could make retirement harder, as many millennials will not accumulate wealth through home ownership as previous generations did.
Social Security benefits may be reduced: Per the Social Security Administration, the typical Social Security benefit is about $1,181 per month for people retiring today. In the future, Social Security benefits may be lower depending on government reforms. This means millennials will need to save more now to supplement for the potential reduction in benefits.
Millennials will need more to retire than their parents and may not have the same institutional resources to support them. Planning now is essential if millennials want to retire comfortably. Setting up a solid savings plan, investment plan and a path to home ownership are all pieces of the puzzle millennials should consider at if they wish to retire comfortably.