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Will Millennials Ever Start Saving for Retirement?

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The big bull market in stocks over the past four-and-a-half years has rescued many people's retirement savings from the brink of ruin. Yet among younger people, the extreme market volatility since the turn of the millennium has made many reluctant to start investing at all, let alone take full advantage of the opportunities they have for tax-favored growth.

Fidelity recently released its latest quarterly report on the state of the 401(k) plans it manages. Across its client base, the average balance in 401(k) accounts rose to $80,600, up 11% from year-ago levels. When you take out those who've switched jobs or recently started saving and look solely at those who've stayed in their existing job for the past 10 years, the average goes up to $211,800, a gain of 19%.

Obviously, those gains reflect the big rise in the financial markets over the past year. But Fidelity identified a troubling trend, noting that "many younger workers -- especially Millennials -- aren't saving at the recommended 10% to 15% of their income." That finding confirms what others have already seen among those who have come of age since 2000: that an emphasis on dealing with outstanding debt has taken Millennials' attention away from long-term investments.

Part of the bigger picture
Retirement saving is important, but it's far from the only financial priority that you have to address. Shorter-term needs like saving up to buy a home or car or for your children's college education also take away potential financial resources from retirement savings.

Yet many Millennials have made getting their debt under control their top priority. As the Pew Research Center found in a report earlier this year, extensive student loan debt has forced Millennials to make tough financial choices, and they've increasingly put off making major purchases in favor of reducing debt levels. The Pew study found that fewer Millennials had bought homes and cars than their older peers, and credit card use and outstanding balances were well below the levels that previous generations had seen.

Another reason why Millennials don't save as much toward retirement as they should is that they don't always know their investing options. In support of its own retirement-investing business, Prudential (NYSE: PRU  ) did a study showing that the majority of Millennials think their workplace retirement plan is too complicated, with almost half characterizing it as "very risky." Yet more than 75% of Millennials said that they're highly motivated to save for retirement, making it their second-highest priority after getting student debt paid down.

The big business of retirement plans
Clearly, Fidelity, Prudential, and other companies have a vested interest in retirement-savings activity. For years, financial companies have fought to gain market share in the private retirement plan market, and banking giants Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) have boosted their staffing to try to target retirement plan management opportunities.

We've also seen similar activity in the public pension arena. Just earlier this month, Sen. Orrin Hatch pushed for public-pension reform that would open the door to Prudential, MetLife (NYSE: MET  ) , and other insurance companies to offer annuities to pension-plan participants. Some have criticized the proposal as being a boondoggle for insurance companies, but it also highlights the tension between insurers and the asset-management specialists that currently control a large chunk of pension assets.

Why Millennials need to bite the bullet and save
Millennials who don't want to support big banks and insurance companies in the wake of financial crisis-era bailouts might not like how financial companies use 401(k) plans as a revenue source. Yet given the benefits of 401(k)s as part of an overall retirement strategy, avoiding them on principle simply costs too much down the road.

Fidelity and its peers face an uphill battle in educating Millennials about the need to save for retirement. With signs that Millennials are at least addressing their debt situation well, however, giving up on the generation's retirement prospects is at this point premature.

Millennials aren't the only ones choosing not to invest as much as they should. Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On August 29, 2013, at 6:01 PM, XXF wrote:

    It not that Millennials don't know, it is that they know so much much that isn't so. I'm 24 and was in an unfortunately lengthy discussion with a "peer" recently about 401(k) plans offered at our respective jobs. He insisted that only a fool (small f) would put money into a 401(k) because all 401(k)s take 4% of the money that you put in off the top. Obviously that is not accurate, so I asked him to elaborate, if perhaps he had investigated funds with loads. He had not, his vast wisdom on the topic came from what he heard at an Occupy rally.

    As an avid tax advantaged account user I attempted to prove to him that what he believed to be true was not by showing him the funds that I invest in my 401(k) and Roth 401(k), such as VINIX with no loads and a .04% (yes, 40 cents per $1000 invested) expense ratio and HAINX, by the most expensive fund with a .77% expense ratio. My portfolio weighted average expense ratio is .40% or $4 per $1,000 invested. Obviously my evidence was not well received and empirical evidence was trumped by what he was told by a homeless art school dropout. His belief that they (direct quote) "Secret take it" persists despite my efforts.

    This year I'll put $11,500 into a traditional 401(k) and $6,000 into a Roth 401(k) and my only real dilemma with the decision is whether I should continue my current allocation, which includes exposure to foreign equities, small and mid cap growth equities, and additional large cap value equities or if I should move the balance to straight VINIX and cut my portfolio expense ratio .36%.

    It isn't principle that prevents Millennials from saving, it is willful ignorance.

  • Report this Comment On August 29, 2013, at 6:14 PM, medguy1 wrote:

    This generation is lucky if they can find work at Starbucks..THAT is why they are not saving

  • Report this Comment On August 29, 2013, at 6:50 PM, XXF wrote:

    @ medguy1 - I graduated two years ago and do not know a single STEM grad who did not have multiple offers well before graduation. It is all about choices and people who choose not to develop skills that would qualify them for work more sophisticated than Starbucks made their own bed and knew what they were doing as they made it.

  • Report this Comment On August 29, 2013, at 11:09 PM, zjk1018 wrote:

    I've been in the restaurant industry for years and have worked with dozens of English, Sociology, Communication, Philosophy, and Journalism majors. So If you choose to take the easy route that's where you're going to end up, bar tending and waiting tables. However I have yet to run into an Engineer struggling to find work, or a Nurse that's looking for a job. College is your choice you don't have to go, but if you do make it worth it. There's just no sense in going into debt to end up working at a bar anyways.

  • Report this Comment On August 30, 2013, at 9:37 AM, broknrekord3 wrote:

    Gosh, there's so much to be said; not just about the article, but the comments.

    Seems like there's quite a few folks around here patting themselves on the back for being so amazing as to go into the STEM programs, blissfully ignoring that prior to 2006, people that did go to school for the liberal arts were able to get jobs in marketing, communications, as teachers, etc. Since then, however, that's clearly not the case. Should they have gone into the sciences? Maybe. But should we not have people invested into the liberal arts at all? The point being is that you aren't better because you DID go for a STEM program; you shouldn't be looking down at the folks that did and got burned by an economic collapse. They will complain as surely as you probably complain about something else. In other words, get over the fact other people made different decisions that they may regret, I'm sure you have as well.

    However, to the point of the article, many millennials are burdened with absurd amounts of debt, which, paired with extremely high costs to live in urban areas where a college degree is best used, leads to little, if any extra income to invest. Compiled with all the other mementos of becoming an adult (getting married, buying a place of your own), retirement for most of us is simply a fantasy that we are aware will probably never happen.

    I AM one of those 'liberal arts' kids. BA/BS English, Secondary Ed, with a double minor in Writing and Economics, and an MA in Post-Colonial Lit with a focus in Marxist Economics. I have a good job, unlike most of my colleagues, and their contribution to keeping arts and literature alive is crucial to our society, regardless of the financial limitations. People have and always will study the arts because it IS important, whether or not it is lucrative (and, in fact, only over the past 50 or so years with the rise of marketing did it every offer job prospects). The only thing that has changed over the past 2 decades is that it is no longer feasible to study the arts for the love of art due to tuition, which is, quite frankly, sad.

    If Einstein was correct in stating that art is revolution, then its diametric is as well, in that the lack of art is the lack of revolution, that is, the lack of motivation to challenge authority. In that vein, those of you who wish to complain about 'the state of things' have nothing to complain about, as you actively choose to marginalize the value of those 'liberal arts' that led protests to the footnotes of history.

    There's plenty more to be said about the volatility of the markets over the past decade, which is exacerbated through the yellow journalism which has overtaken most financial reporters. Combined with all of the other issues, is it really a surprise that retirement isn't in the budget?

  • Report this Comment On August 30, 2013, at 10:51 AM, NickSBU wrote:

    I've got an MBA in Finance and my college barely taught me anything about how much to save for retirement. Luckily I got my head out my ass and started saving at age 27.

    My advice to everyone is put aside at least $100/month per person.

    Currently I'm fortunate enough to put $200/month into 401(k), and $100 into a whole life insurance policy that builds cash value. $300 a month could be higher but I'm proud I've reach a point where I can afford to do this and not break my bank.

    You have to start by the time you're 30 or you'll lose the benefits of compounded interest.

  • Report this Comment On August 30, 2013, at 2:05 PM, jpanspac wrote:

    I think you meant to say boon, not boondoggle.

  • Report this Comment On September 03, 2013, at 6:20 PM, neelvk wrote:

    @NickSBU - You should ask for your money back from the MBA school. You obviously haven't learned a thing.

  • Report this Comment On September 04, 2013, at 3:26 PM, olivert1984 wrote:

    I'm 29 and have been savings for retirement for 3 years. But of course I only started doing so after paying off all non-mortgage debt ($87,000). Paying off debt the past few years made just as much, if not more sense than investing. I could put more money in my 401(k) which lost me money in 2010 or apply it to student loans i was paying 5.25% on. A reduction of expense isn't really different than additional income. This caused my monthly cash flow to increase $350+ which I then used to pay off other debt. Now that it's all gone, I can contribute 11% of my salary to retirement (15% if you include employer match)since I don't have cash sucking debt.

    As for the investing side of retirement I have many friends with SEP-IRAs, Roth, traditional etc that just put their money in low cost (e.g. vanguard) funds that provide good yeilds without the idiocy of those chasing "alpha." Nothing wrong with that.

  • Report this Comment On September 08, 2013, at 3:41 PM, ershler wrote:

    broknrekord3,

    The engineering and agricultural programs subsidized the liberal arts programs at the university I attended and I still had to pay extra for the engineering degree I earned. I've given enough to people who decided to take on absurd amounts of debt to get a liberal arts degree. If you want to live like a pauper that is fine with me, wear your yoke with pride but don't complain about it.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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