A number of financial studies over the past decade have indicated that many Americans are not saving enough money for retirement. In general, American workers are saving less and working longer, well past the retirement age of their parents and grandparents. Many new retirees are seeking employment soon after retiring to supplement the meager income they receive from pensions and government savings programs. In short, there’s a retirement savings crisis, and nowhere is this crisis more visible than in the nation’s young people.
Why Aren’t Young Workers Saving for Retirement?
In today’s fast-paced economy, fewer opportunities exist for secure, stable employment options. Young people (“millennials” for the purpose of this article) across the country are working for companies that don’t offer any type of employer-sponsored retirement plans, such as 401(k)s. In fact, a recent study conducted by the Pew Charitable Trusts suggest that less than 31 percent of millennials take advantage of employer-sponsored retirement plans. Compared to rates of all workers, that is a very low percentage.
Low salaries and steep student loan payments eat into the amount younger workers are able to set aside for retirement. And, confusion about the options available and the complex language in the financial world have turned many millennials away from establishing their own retirement plans, especially those who do not have access to employer-sponsored plans. What are some of the factors that influence this alarming retirement savings trend? Read on.
Millennials Aren’t Saving for the Future
Here are some of the many factors that influence millennials and their inability to save adequately for retirement:
Millennials are working for companies that do not offer retirement benefits – many young people are gravitating to startups and small companies in the tech sector. These are attractive places to work, but many do not offer anything in the way of retirement benefits. Around 41 percent of all millennials aged 22 and older do not have access to retirement benefits like 401(k) plans or pensions. This is in contrast to 35 percent of all American workers. Millennials may also be more prone to accept jobs without retirement benefits. Job-hopping, or working for a succession of companies, also interferes with employer-based retirement plans; millennials often switch jobs frequently and do not build up any appreciable retirement savings, even if an employer-sponsored plan is available.
Millennials Aren’t Eligible for Employer-Sponsored Retirement Plans – small companies do not always offer retirement benefits to their employees. So, many millennials struggle with retirement savings right from the start. The picture is complicated by eligibility requirements imposed by companies that DO offer 401(k) and other retirement plans. Since millennials are prone to switching jobs frequently (see above), this impacts their ability to qualify for the retirement plans that are available. Over half of all millennials working for companies with retirement benefits are not taking advantage of the plans due to ineligibility. Eligibility standards affect millennials so deeply because many of them switch jobs frequently, but may also be working in their first “career” job and don’t have the hours needed to join retirement plans. A sizable percentage of millennials are working in part-time jobs, or juggling two or more part-time jobs – and part-time employment rarely comes with retirement benefits of any sort.
Millennials May Have Other Financial Priorities – young people just starting their adult lives tend to work at jobs that don’t pay much. And, financial priorities such as raising children, purchasing first homes, and paying off student loans may keep millennials in participating in retirement savings plans. Studies by retirement planning groups have shown that millennial parents are substantially less likely to enroll in retirement plans than their counterparts without children. That first-time home purchase has become a priority for a lot of new workers as well. Effectively, meager salaries cannot cover these financial obligations AND have money left over for retirement purposes.
Millennials Aren’t Enrolling in Retirement Plans — In the Pew study, only about half of all millennials enrolled in employer-sponsored retirement plans if such plans were available. This is in sharp contrast to the rate of all workers, where the enrollment rate is around 75%.
More millennials are likely to enroll if their employer offers matching contributions. If contributions are matched, the enrollment rate for millennials jumps up to 72%. Financial experts stress that young people need to take advantage of this “free money” if it is available from an employer.
What Can Millennials Do to Save for Retirement?
Faced with these alarming statistics about the rate at which millennials are preparing for retirement by saving money, many young people may wonder what they can do to ensure a comfortable financial future. There are several steps young workers can take to prepare for retirement, and the first is to take advantage of any employer-sponsored plans. If such a plan is available that has employer-matched contributions, it is critical to enroll as soon as possible and to make the maximum contribution allowed by the plan. Making the full contribution can be tough on a smaller salary, but by making the full annual contribution, one can maximize the effect any employer matching incentive.
Finding a job that pays better is another solution. In the Pew Charitable Trusts study, it was shown that the higher the salary, the more likely millennials were to enroll in plans. For those making $25,000 or less a year, the enrollment rate was about 50% if a 401(k) plan was offered by employers. For those making $50,000 to nearly $100,000, the percentage rate increased to about 70%. For income earners above $100,000, the enrollment rate hovered at 80%.
Finally, it is critical for today’s younger employees to understand that there are alternatives to the employer-sponsored pension or retirement plans. IRAs are a great solution for those who do not have access to employer-based retirement benefits. As with any financial endeavor, it is important to speak to a retirement planner or certified financial advisor to get the best information. IRAs serve as tax-sheltered brokerage or banking accounts that help people set aside money for retirement.
Millennials need to know that there are alternatives available for retirement planning, and by doing a little bit of research, they can help protect their financial futures with some smart investments and the advice of retirement planning professional.