Millennials aren’t saving enough for retirement

Published Jan 15, 2017

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Washington - The projections are in and Wall Street analysts

have pretty low expectations for how the stock market will perform this year.

A roundup of the figures

shows that strategists project the Standard & Poor's 500-stock index will

gain 4 percent on average in 2017 - the lowest expected annual gain for the

stock market since 2005, according to an analysis by Bespoke Investment Group.

While it's impossible to

predict exactly what the stock market will do, investing pros over the past

several months have been reducing their expectations for what they think the

stock market will return, not only in the next year, but potentially over the

next couple of decades.

If those gloomier outlooks

hold true, workers saving for retirement today may not get as much from their

portfolios in the long term as previous generations did. Advisers say that

millennials, who are decades away from retirement, will need to save more - in

some cases twice as much as they were saving before - to make up the

difference.

"Realistically, most

people who are reading this article probably should expect to work a little bit

longer than their parents did," said Tim Koller, a partner with the

consulting firm McKinsey.

Even a small drop in market

performance can make a huge difference.

If average annual stock

market returns fall by two percentage points over the next couple of decades, a

25-year-old saving for retirement would need to more than double how much she

is saving to make up the shortfall, according to an analysis by the Employee

Benefit Research Institute.

The pessimistic predictions

come at a time when younger workers are already struggling to save for

retirement while they pay off student loans, face high child-care costs or deal

with rising rent. But firms such as McKinsey predict that US stock markets may

not deliver as much as they have in years past, putting more pressure on

millennials to save as much as they can. US stock markets gained 7.9 percent

a year on average between 1985 and 2014, a track record that Koller and other

economists say is unlikely to be repeated.

Read also:  Millennials aren't cheap, they're thrifty

The reason for the dismal

view is that stock market gains were so robust over the past 30 years that it

will be pretty tough for the stock market to match those returns going forward,

some economists say. Stocks have grown pricier as the market has climbed

higher, giving them less room to grow.

If the economy grows more

slowly, that could also drag down stock market returns, Koller said. The US population

is not growing as quickly as it did, which could lead to fewer workers and

reduce the amount of services and goods that companies can produce. At the same

time, more people are retiring than are entering the workforce, which means

that the number of people selling stocks to pay for living expenses is

increasing faster than the number of people who are buying stocks in their

retirement accounts.

GMO, a financial firm that

accurately predicted the previous two market downturns, announced in September

that it expects US stocks to fall by an average 3.6 percent a year for the next

seven years. John Bogle, who founded the investment firm Vanguard, said market

returns will "inevitably" be lower over the next decade.

Up for debate

Exactly how much millennials

should be saving for retirement in light of these lower projections is up for

debate. Many financial advisers recommend that workers aim to save between 10

and 15 percent of their pay. But other experts say millennials should save much

more, up to nearly a quarter of their income, to avoid running out of money in

old age if stock market returns fall.

For instance, the personal

finance website NerdWallet recently estimated that millennials need to save 22

percent of their paychecks to have enough cash in retirement if stock market

gains are weaker going forward. The study assumed that workers would not receive

any income from Social Security, in response to a survey from the Pew Research

Center finding that 51

percent of millennials assume the entitlement program won't be there for them

when they retire.

But if young workers can't

sock away that much, the bottom line is to start saving, and investing, as soon

as possible, financial advisers say.

Workers who aren't saving as

much as they want to can aim to get there over time by having their

contribution rate increase automatically by one or two percentage points each

year, financial advisers say. And taking advantage of matching contributions

from an employer can help. For instance, a worker can get to a target 15

percent savings rate if he contributes 12 percent of pay and receives a 3

percent match from his employer.

"The first step is

usually just to do something," said Brian Nelson Ford, a financial well

being executive for SunTrust Bank who recommends that young people aim to save

at least 15 percent of their pay. "Taking action and taking control of what

they can control is vital."

WASHINGTON POST

 

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