Millennial retirement is not hopeless
I watched an online video by a millennial meant to highlight the enormous challenge people aged 30 to 45 face when saving for retirement. In the video, the author said that a 30-year-old would need to save $5.5 million to retire at 65 and have the equivalent of a $100,000 income in retirement. This would require saving $1,000 every month until retirement. My first thought was, wow, where did he get those numbers?
Of course, the way it was stated, especially the need for $5.5 million, makes it seem impossible; thus, only a few watching the video will rise to the challenge, while the rest will give up, living in the moment and working until they drop dead. I think this young man understood enough to be dangerous when he posted the short clip on TikTok because he skipped over many factors you must consider to save properly for retirement so far in the future. I agree it’s challenging, but it’s no different from the challenge anyone without a corporate pension has faced since the 1970s.
First, when he says you’ll need the equivalent of $100,000 to live on, is he referring to a job that pays $100,000 today (from which income, Social Security, and Medicare taxes are deducted), or $100,000 in retirement expenses? Those are two different things. Second, even with high inflation today, $100,000 is a pretty good income in most of the U.S., and a large percentage of current retirees are living on much, much less than $100,000. So, the first thing to understand is that in retirement you will live on 50% to 85% of your final pre-retirement income. For example, assume you make $65,000 at age 30. If wage inflation averages 3% over the next 35 years, you’ll be making $177,500 at retirement. But you won’t need $177,500; you’ll only need $88,750 to $150,875, depending on other factors like paying off a mortgage and how large or small your lifestyle is.
Next is the statement that you’ll need to save $1,000 every month until you retire. That advice contradicts what you should do. Saving $1,000 per month for retirement on an annual income of $65,000 is over 18% of your income and will be very difficult for any 30-year-old. However, in the last year before retirement, that same $1,000 would represent less than 7% of the $177,500 salary. The reality is that most people should start at a lower percentage and increase their savings rate over a working career as their wages rise. Start at 7% at 30 (or $379 per month) and increase to 15% as you approach retirement ($2,600 per month in this example). This approach works best for most because as income grows, there is more room in the budget to save. The increase needs to be across those years, not just at the end.*
Finally, he made no assumptions about an employer contribution to retirement savings or the existence of Social Security in 35 years. Today, for companies that do provide retirement contributions, the range is 3% to 6%, which is one-third to one-half of what an employee saves each month. Now, the monthly amount doesn’t seem so bad. And if you don’t get employer contributions, it’s up to you to make up the difference.
It’s no secret that the Social Security program is on shaky ground right now. Tax revenue won’t be enough to pay full benefits in a few years, and if nothing changes, benefits would be cut by about 25%. This reduction would balance benefit payments with current tax revenue, but it would push millions into poverty. That does not mean the program goes away, but it requires several fixes to avoid what would be a political disaster. My view is that the program’s financing will be fixed, benefits will be retained for lower incomes, but higher incomes will likely receive less than in the past. Anyone in their 30s has the right to be concerned, but they should also be motivated to encourage Congress to fix it for future generations. Therefore, I recommend assuming you will get a benefit until told otherwise.
Social Security will provide 40% or more of most people's total retirement income. At 30, it can be very hard to estimate the monthly benefit accurately, so start with that assumption: Social Security provides 40% of your retirement income. Finally, the video didn't mention key aspects of saving for retirement, including consistent saving (usually automated), investing well (broad, low-cost funds), and building a plan to track your progress toward your goal.
So, I’ll give you what my voice track for that video would have sounded like:
A successful retirement requires consistent, automated saving and investing over decades. Start as soon as you can, saving at least 7% of your income and increasing that share over time, eventually aiming for 15%. Over 35 years, if you save only $445,000, through the magic of investment compounding, it will grow to more than $2,000,000. With Social Security, you’ll have a lifestyle equivalent to your working years because of your planning and diligence in achieving your financial goal.
My words are far less dire than that TikTok video because of the last 8 words: planning and diligence in achieving your financial goal. Yes, a 30-year-old needs to get started, but they don’t need an unrealistic bar set at the start. A good retirement is easy to achieve if you start at 30, but it gets much harder the longer you delay taking responsibility for providing for yourself in later years.
* Why do I know the stated values work? In a few minutes, I entered the scenario into a retirement planner, in this case the Retirement Checkpoint tool available here. A partial snapshot of the plan I built is shown below. All assumptions are reasonable, not aggressive, yet the plan can provide 75% of your final work income. I used a simple Social Security calculator on the Social Security website here: https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html#today. Note that only a $1.5 million balance is needed at retirement, which comes from approx. $445,000 in savings over 35 years.
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