October 14, 2017

Guess which workers stand to retire the richest

When it comes to financial responsibility, Millennials tend to get a bad rap. Often criticized as lazy, entitled quasi-adults willing to blow their income on fancy coffee and avocado toast, they’re the last people you’d think would be on track to retire comfortably. But new data reveals that, apparently, we have things totally wrong.

In a just-released NerdWallet study, Millennial parents, in particular, are outsaving parents of every other generation, and should have the most income once retirement rolls around. Based on these recent findings, if each generation (Millennials, Gen Xers, and Baby Boomers) were to maintain its current savings rate between the ages of 26 and 67, Millennials would end up with over $1 million more in retirement than Boomers and $400,000 more than Gen Xers.

How is this possible? Much of it boils down to impressive savings rates. Of those who are actively setting money aside for the future, workers between the ages of 18 and 34 are socking away a median 10% of their yearly income. Gen Xers aged 35 to 54, meanwhile, are saving a median of 8%, while boomers age 55 and over are contributing a median of just 5%. But while strong savings rates are clearly fueling younger workers’ projected success on the retirement front, there’s another weapon Millennials have in their arsenal that’s giving them a definite edge: time.

Start early to grow your wealth

While it’s true that younger workers may be saving at higher rates than their older counterparts, let’s remember that they’re also, for the most part, earning less as well. So then how can it be that Millennials across the board are on track to outsave Gen Xers and Boomers by $1 million and $400,000, respectively?

It’s easy — the answer boils down to compounding. Compounding is the concept of earning interest on interest, and it’s what allows savers to turn a series of relatively small contributions into a sizable sum over time. But to best take advantage of compounding, you’ll need to start focusing on retirement early on — and that’s where so many Millennials are getting it right.

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Say your goal is to retire with $2 million. You don’t actually need to set aside $2 million of your own money throughout your career to achieve that objective. Rather, if you consistently sock away $600 a month over the course of a 45-year career, and invest that money in a manner that generates a 7% average annual return (which is more than doable with a stock-focused portfolio), you’ll end up with just over $2 million by the time you’re set to retire. At the same time, you’ll have contributed just $324,000 of your own money to make that happen.

Therein lies the beauty of compounding, and it’s what’s helping younger savers outpace older generations whose savings windows are more limited. Remember, unlike Boomers, Millennials have been urged to save for retirement from the start. Even older Gen Xers didn’t have the same urgency to set aside money for the future as today’s youngest workers. So if you happen to be relatively new to the working world, you have a real chance to capitalize on what could be a very rewarding opportunity. On the other hand, if you wait too long to start saving for retirement, you may end up disappointed (or, worse yet, cash-strapped) down the line.

The following table highlights the precise trouble with holding off on retirement savings, even if for only a few years’ time: