Retirement outlook for millennials

And now for something different. Although I spend most of my time writing and speaking about retirement income issues, sometimes I get the chance to address young workers at the beginning of their careers, as I did recently as part of National Retirement Planning week.

“If you’re in your twenties or thirties, every financial action you take — from racking up debt to saving for retirement — compounds over time,” I told a gathering of Capitol Hill staffers during a lunch-and-learn session sponsored by the American Council of Life Insurers. “By taking a few simple steps now, it could add up to big bucks later.”

These young workers are lucky. The federal Thrift Savings Plan is known for its menu of extremely low-cost proprietary index and target-date funds, and automatic enrollment starting at 3% of salary.

“That’s a good start but frankly, if you save only 3% of your salary throughout your career, your retirement may look a lot like your college days,” I warned. “You’ll be eating a lot of ramen noodles, but you won’t be as cute, and when some asks to see your ID, it will be for the Walgreens’ senior discount.”

The TSP also offers a generous matching contribution formula of up to 5% of salary.

“Imagine if you could boost your contributions just a bit to 5% of your salary so you could capture the full employer match, directing 10% of your gross pay to your TSP account each year,” I said. “That amounts to a 100% return on your money before you allocate your investments and puts you two-thirds of the way to the recommended goal of saving 15% of gross salary.”

But not all millennials, defined as Americans born between 1981 and 1991, enjoy such a healthy start on their long-term financial goals. Although about two-thirds of this 83-million-plus generation of workers have access to an employer-sponsored retirement plan, only about half of them participate, according to new research from the National Institute on Retirement Security.

“The eligibility requirements set by employers, which keep 45% of working millennials out of plans, drive this coverage gap rather than workers choosing not to save for retirement,” the NIRS report found. Not working enough hours and insufficient job tenure are the primary impediments to plan participation.

The remaining 66% of working millennials have nothing saved for retirement. That’s particularly troubling as they face a higher life expectancy, lower income replacement from Social Security and are less likely to have a traditional defined benefit pension than prior generations. This means millennials must save significantly more than previous generations to maintain their standard of living in retirement.

Millennials also have substantial student debt, began their careers in the tough job market following the Great Recession and operate in a labor market where a declining share of jobs provide pensions and health benefits, according to a report from the Center for Retirement Research at Boston College, Will Millennials Be Ready for Retirement?​

“These factors have delayed major life milestones such as getting married and owning a home and have limited their ability to accumulate wealth,” the CRR report added. “In short, Millennials are behind.”

Now it gets personal. I look at my two millennial sons, both unmarried and sharing a rented apartment to cut their expenses. One has a full-time job as a video editor with good benefits. The other one is a self-employed DJ with meager savings and buys his health insurance through the Affordable Care Act market place — for now. Neither has student loan debt.

My husband and I kid about the “curse of the creative genes” in our family. Our two sons are passionate about their careers and happy with their choices, but we do worry about their future.

Despite the general headwinds to financial security that many millennials face, the picture is not all bleak.

Millennials’ retirement prospects might be buoyed by the higher rates of college education for both men and women, and higher earnings for women compared to previous generations, according to another recent report from the Urban Institute.

Continuing to work beyond the traditional retirement age may be part of the solution for millennials, as it is for baby boomers and Gen Xers.

“Labor force participation has risen sharply over the past two decades at older ages, which allows people to receive higher monthly Social Security benefits, save part of their additional earnings and shrink the period over which their retirement savings are spread,” the Urban Institute report said.

Given these conflicting trends, there is no consensus how millennials will fare in retirement, but there is hope that continued economic growth could boost their prospects. One of the big unknowns: future public policy decisions about Social Security.