Ever since Millennials entered the workforce, the media has had a field day with stories about the generation’s inclination for being lazy and self-entitled. While these descriptions may apply to some, none of these are the real reasons behind why many young people are not able to gather enough retirement savings.
Retirement Savings for Millennials
The monthly expenses add up with paying rent, bills, and making student loan payments. After all these financial obligations are paid, most Millennials find that there’s often not enough left over for savings each month. This challenge is made even more difficult by the fact that Millennials are trying to earn a living during a time of stagnant wages and high unemployment rates. Under this reality, the numbers are not at all surprising.
According to a report by the National Institute on Retirement Security (NIRS) called “Millennials and Retirement: Already Falling Short,” 66 percent of Americans between the ages of 21 and 32 have no retirement savings. Retirement isn’t treated as a priority compared to other more pressing financial obligations, such as paying down student loans or buying a house. But the problem with this is that waiting to save for retirement could mean that millennials may have to work a little longer before they can retire; missing out on valuable years of compounding returns means they won’t have enough money for retirement.
But there is good news: not all 83 million millennials are behind. According to the NIRS report, about one-third say they are currently saving up for retirement. While most have less than $20,000 in retirement savings, some say they have much more stored in their nest egg—$67,891 is the average account balance.
For those who are saving, it’s highly likely that their employer offers a retirement plan, such as a 401(k). However, most millennials face another unfortunate reality: they don’t meet the eligibility requirements for a 401(k), even if their current employer offers one.
The NIRS report found that 66 percent of millennials work for a company that offers a retirement package. However, not everyone gets to participate. The problem isn’t the millennials themselves. Instead, the employment structure may be a bit problematic.
As stated in the Employee Retirement Income Security Act of 1974, employers can restrict participation to 401(k) plans to include only employees who have worked for at least a year. Employers also have the power to make the plan available only to employees who have clocked at least 1,000 hours per year. Therefore, under the act, employers can exclude new employees and part-timers.
These rules present a real problem because, according to the same report, 25 percent of millennials are employed part-time, and 50 percent have been working only a year or less at their current job.
So, how can it be fixed?
If you’re a millennial and you’re among those who don’t have retirement savings, you may want to consider two options. The first is to negotiate with your current company to allow you to gain eligibility. You can also try looking for another job that offers retirement benefits.
The next option is setting up and funding your retirement account, such as an Individual Retirement Arrangement (IRA). IRAs come in two variants: traditional and Roth.
Those who choose traditional IRAs find that they are given a tax year the year they make the payment. The money then grows tax-deferred in the account every year until retirement. Only then can it be taxed. In comparison, those who prefer Roth IRAs find that they are no tax breaks on the year of the contribution. However, the money grows tax-free and can also be withdrawn without paying taxes in retirement, making it a favorite variant among many.
IRAs are often seen as superior to 401(k)s. The following limits contributions to a select group of funds, while the former gives total freedom to invest in more instruments, such as bonds, funds, and stocks, among others. So, with an IRA, you get to direct your retirement funds in any way you see fit.
Also, 401(k)s are also notorious for the extra fees, which can drastically affect your investment returns. While IRAs usually don’t have these additional fees, it depends on the online broker you choose.