A recent retirement study conducted by asset manager Vanguard has revealed a surprising trend: millennials are actually better prepared for retirement than their baby boomer counterparts. Despite facing challenges like significant student loan debt and limited access to pensions, younger workers are excelling in terms of retirement readiness, as evidenced by their savings rates relative to their age.
One of the key factors contributing to this positive outlook is the evolution of retirement plan design, particularly the widespread adoption of automatic enrollment by employers. As millennials entered the workforce, many were automatically enrolled in retirement plans, often with the inclusion of target-date funds. Some plans even incorporated features that automatically increased employees' retirement contributions over time. This combination of factors has set many millennials - and even some Gen Xers - on a promising trajectory towards retirement.
Fiona Greig, Global Head of Investor Research and Policy at Vanguard, highlighted the significance of this research, noting that it challenges the common belief that younger generations face insurmountable obstacles when it comes to saving for retirement. Greig credits improved defined contribution plan design for the positive financial impact on millennial and Gen X savers, emphasizing that these plans encourage saving and investing in appropriate asset allocations as individuals age.
In order to assess Americans' retirement prospects, Vanguard examined projections assuming individuals continued to save at their current rate throughout their working lives. They then compared these projections to retirees' spending needs, ultimately calculating the potential savings gap or surplus. This assessment allowed Vanguard to measure the percentage of pre-retirement income that individuals would be able to replace throughout retirement in various market and mortality scenarios - what they refer to as the sustainable replacement rate.
Overall, this Vanguard study paints an optimistic picture for millennials when it comes to their retirement savings. These findings highlight the effectiveness of automatic enrollment and improved plan designs in fostering greater financial security for younger generations.
Vanguard Retirement Readiness for Different Generations
Vanguard recently conducted a study to assess the retirement readiness of three different generations: early millennials (ages 37-41), mid-Generation X (ages 49-53), and late baby boomers (ages 61-65). The study also analyzed four income levels for each generation.
The analysis revealed that younger Americans are in a better position for retirement compared to their older counterparts. For example, millennials at the 50th income percentile (earning around $42,000) are projected to generate sustainable retirement income equal to 58% of their pre-retirement earnings. This is 8 percentage-points higher than the estimate for median-income late boomers (50%), as determined by Vanguard.
However, overall retirement savings for Americans could still use improvement, especially for low-income workers. Late boomers at the bottom quartile of income distribution, with a median income of $22,000, are expected to have retirement spending equal to only 64% of their pre-retirement income. This leaves them with a significant savings gap of 32% between their sustainable replacement rate and their actual spending needs.
Not surprisingly, high-income workers across all generations are better prepared for retirement compared to their low-income counterparts. Workers at the 25th income percentile face a projected retirement savings gap of 32% across all three generations. On the other hand, high-income families are projected to have a savings surplus of 20% based on expected spending needs, according to Vanguard's findings.
Joe Davis, the Chief Global Economist and Head of Investment Strategy Group at Vanguard, highlighted the importance of a secure retirement as part of the American dream. He acknowledged the challenges and opportunities that policymakers, employers, and individual investors face in helping Americans achieve this dream. The aim of Vanguard's report is to raise awareness in the industry and the nation as a whole, encouraging the development of more solutions to promote retirement readiness for all Americans.