Are we prepared? Millennial retirement dilemma

Legendary hockey player Wayne Gretzky famously once said that the secret to his success was that he would “skate to where the puck is going to be, not where it has been.” Most, if not all of us would agree with this statement, but there is cause for concern for the Millennial generation as many of them are falling behind in preparing for retirement. They must overcome some unique socioeconomic challenges if they are to avoid a severe retirement crisis in 2050.

In this article, I want to explore what some of those challenges are and some steps that Millennials can take to stay on top of their retirement planning.

An Uncertain Labor Market

In the beginning, the Millennial generation had all the makings of a success story, having more education and college graduates than prior generational cohorts. However, as the largest and most educated generational cohort in the marketplace, competition for good-paying, career-track jobs is fierce. Many of these Millennials are graduating college either without jobs or with a job in a field different than what they went to school for.

Additionally, with the rise of technology, computers and bots are taking the place of human workers, and cheap, foreign labor is taking the place of the domestic workforce, often remotely. Therefore, Millennnials, who are already getting established later in their careers, may not be guaranteed jobs in the coming years. That is a scary picture for those depending on a W-2 to make a living.

Inadequate Employer Compensation and Fringe Benefits

Millennials are also earning less than the median income for their age group (25-35). In fact, when adjusted for inflation, their average annual salary is an estimated 20% lower than the average salary for a Baby Boomer at the same age, according to a SmartAsset study. That means, when you factor in the mounting student loan debt and cost of living, most Millennials are actually going backwards financially every year.

In today's economy, many Millennials are also not receiving or eligible to participate in important employer-provided fringe benefits, like health insurance and employer-sponsored retirement plans. The lack of access to and participation in employer-sponsored retirement plans is very concerning, given that Millennials who do not have a workplace retirement plan rarely save for retirement on their own. According to a study done by Jennifer Erin Brown of the National Institute on Retirement Security (NIRS), a whopping two-thirds (66.2%) of working Millennials have nothing saved for retirement.

A large contributing factor to the lack of fringe benefits and retirement plans offered is a trend towards a “gig economy”, where freelance and other short-term engagements are becoming the norm thanks to the progression of technology. By 2020, studies predict that 40% of American workers will be independent contractors of some kind, which means that saving for retirement will be entirely dependent upon individual financial planning efforts. As we know, that means trouble for the 66.2% of working Millennials who already do not save for retirement on their own to the extent they continue to procrastinate on that retirement planning.

Student Loan Debt

With increasing numbers of individuals pursuing higher education and the rising costs of higher education, there are significantly more Millennial households with student loan debt than households of older generations. In fact, nearly half of all Millennial households are burdened with student loans. Of these households with student loan debt, on average, those who are in their 20s have over $21,000 in student loan debt, and those who are in their 30s have over $40,000, according to a 2019 Experian study.

To put it into perspective, that is over one-third of their total household earnings. If you combine that with other fixed expenses like housing, car payments, and consumer debt, it’s no wonder Millennials don’t have much money in savings. In fact, a recent Nitro survey states that 41% of people with student loans said “they wouldn’t even be able to afford a surprise bill of $400.”

Rising Cost of Home Ownership

After the market crash of 2007-2008, the prices of real property have steadily increased across the board to the point where experts say another housing market bubble is expected to peak and burst in the near future. Therefore, purchasing homes in today’s economy can be very expensive and those properties may actually lose their value in a matter of years. This means that as Millennial age groups 25-35 begin settling down and purchasing homes, they are entering into the real estate market at a time when home values are peaking. Not only does this put a strain on their finances, but it means that getting a positive return on investment may take a very long time if the bubble bursts in the next few years.

Is There Any Hope for Millennials?

Despite all of this doom and gloom talk, there is still hope for the Millennials to avoid a potential retirement crisis in 2050. While the this young generation does face some unique socioeconomic pressures and challenges, there is hope in proactively understanding these issues and addressing them head-on.

First off, let’s redefine retirement and what that looks like. Traditional retirement from our parent’s era may not be feasible or even worth pursuing for the less-than-inspiring lifestyle in the Millennial age. Instead, I would advocate for financial independence, which appeals more to those who value having the freedom of time and money together instead of having just one or the other, and having both ideally before the traditional retirement age.

Financial Independence: an Unconventional Retirement Plan

If you didn’t already get the picture before, Millennials can no longer depend on a job to provide a retirement plan that will carry them through the traditional retirement age (which is getting higher and higher), given the uncertainty of the job market and trend towards the elimination of retirement benefits by companies. Therefore, this young generation must take a DIY approach to mapping out their financial future.

Traditional 401(k)s and Roth IRAs are great investment tools, but even they require significant investments in order to get the payout that this generation will need to prepare for the rising cost of living and inflation by retirement. Most experts say a minimum 6% of your paycheck should be going to a 401(k) for young bucks and then that should grow to 15-20% of your paycheck the older you get. If you remember, cash flow is a problem for Millennials due to the rising cost of student loans and home ownership. Plus, this money cannot be touched before retirement age without triggering taxes and penalties, with a few exceptions, so that money is off limits until you are too old (or “wise and experienced”) to even enjoy the money.

Therefore, let’s take a look at some alternative ways to create cash flow and attain financial independence.

3 Strategies To Create Financial Independence

1. Follow a budget and live below your means

Whether you’re Warren Buffet or a broke kid from the Bronx, everyone should have a budget. Those impulse buys at Target and spontaneous trips to the beach with friends may not seem terribly intrusive on your finances in the short term, but you may be experiencing “death by a thousand cuts” in your finances and don’t even know it. Money is always being allocated somewhere. It can either be going to a lot of little things in the short term or it can be going towards a few longer term things of significance (like paying off those student loans!), but it is always going somewhere.

Dave Ramsey is a great resource for building a budget. Check out his materials and find an accountability partner to help you stick to it.

2. Increase cash flow with a side hustle

With the prevalence of so many ways to make money in today’s world, there’s no reason you can’t quickly increase your cash flow outside of your full time income with what Millennials so lovingly call a “side hustle.” There are lots of ways to be a hustler these days: becoming a Lyft driver, selling t-shirts, selling shoes, starting a home based business, etc. However, if you are going to invest your time into something on the side, make sure you do your due diligence with the cost of business, level of income you want to achieve and timeline of payoff, especially if your goal is financial independence.

IMPORTANT NOTE: with whatever you do, if you want to create a business income (thousands of dollars per month), then treat it like a real business. If you just want to make a few extra bucks, then treat it like a hobby. The IRS sees it the same way. If you treat your side gig like a hobby, you can’t treat the income or expenses on your tax return like business income or expenses. Hobby losses are now completely non-deductible under the 2017 tax reform, so you get no benefit for treating something like a hobby for tax purposes.

3. Create passive income streams

Passive income should be your long term game plan and ticket to having enough money to enjoy your time and time to enjoy your money, so to speak. Some “side hustles,” such as network marketing home based businesses, can provide both short term cash flow and long term passive income, to the extent you actually treat them like a real business and don’t just dabble. Robert Kiyosaki is famous for championing these “business systems” that can create passive income in his book The Business of the 21st Century, if you want a good resource on the topic.

Other good forms of passive income can be investments in real estate, index funds, dividend-producing stocks, and bonds. For that, I would recommend speaking with a local financial adviser, as there are different capital requirements, fees, investment timelines, and risks associated with each investment type.

So moral of the story, preparing for retirement may look different for Millennials than other generations, but with proper counsel and planning, retirement can look brighter than ever.

If you found value in this article or wanted to continue the discussion, let me know! Comment here or on my blog at LauraGennings.com.