Retirement savings is an important issue for all of us, but especially so for anyone who has not squirrelled any money away for old age—a serious problem for millennials.
Some 70 percent of millennials say they experience stress and anxiety about retirement savings and investments, not least because 40 percent of them have no retirement savings at all, according to a report by Franklin Templeton Investments.
There are good reasons millennials aren’t saving enough. For starters, they earn less than previous generations. An analysis, by the advocacy group Young Invincibles, of Federal Reserve data reveals average household income of $40,581; Millennials now earn 20 percent less than boomers did. Workers in their 20s earn so little these days that nearly 40 percent of young Americans live with relatives, the largest percentage since 1940, according to Trulia.
When you consider that student debt has also soared—a 2016 graduate has an average of $37,172 in student loans compared to graduates from 2003 who had an average of $18,271, according to The College Investor—it’s easy to see why very little is being saved.
The average person needs to save about 20 times their annual living expenses to be comfortable in retirement. For example, someone comfortable living on $50,000 annually in retirement, should save $1 million. Someone spending $100,000 annually in retirement, should plan to save $2 million.
Millennials are falling so far short of that target that 25 or 30 years from now it will be a national crisis unless millennials and their employers take action soon.
Why does it matter to employers that their employees save now rather than later?
Millennials who discover 10 years into their career that they have not saved enough may move to a company that offers better retirement planning and saving benefits.
So, smart employers should act now to keep their employees for the long run. Companies that fail to act may lose those employees just at the time when they become the most valuable.
Because of the mathematics of compound interest, the savings made in the first 10 years of your career can yield more retirement money than whatever is put aside in the subsequent 25 years. Contributing early with a little is better than contributing later with more.
For example, if an employee puts aside $5,000 per year in a 401(k) starting at 25 and generates a 6 percent return annually, by 65 that employee would have saved almost $800,000. By comparison, saving twice that amount ($10,000) annually starting at 40 would leave the employee with less than $570,000.
Many employers tell me that based on what they see many millennials saving, they really should be doubling what they’re saving today.
So, what can employers do to help now?
The most important thing is to press millennials to save more, earlier in their career.
Employers can start by amending their retirement plans to automatically increase participant contributions by 1 percent annually, pushing employees to put aside more than they might otherwise. Such programs are effective and still give employees the choice of opting out.
Getting employees saving young and escalating such amounts is so important because many simply set their savings level once and then keep it for life. If they set it right initially they will be fine in retirement; set it too low and they may face hardship in their senior years.
It’s also high time that employers admit that holding town hall style meetings to discuss savings don’t work. Millennials won’t show up anymore for your meeting for a slice of pizza or donuts and coffee.
However, if employers engage with staff using modern means—an offer sent over a retirement savings app or simply by texting employees—they can garner much higher levels of engagement. Sending a targeted text message to lower contributing staff over their smart phones asking them if they would like to increase their retirement savings rate can be remarkably effective.
Employers that really want to help should also consider changing their compensation structures. For example, instead of paying a young worker $75,000 with a 3 percent 401(k) contribution (for total comp of $77,250), they could pay that same person $68,400 with a 13 percent guaranteed employer contribution (for total comp of $77,292.)
With Social Security potentially not providing enough money for Americans to live on in their senior years, it’s essential that employers work with millennials today to ensure they’re saving enough for their retirement.
The alternative may be sharply higher income taxes 25 years from now and millions of Americans without the retirement savings necessary for basics such as heat, food, healthcare and shelter.