While many Americans wish they could retire immediately, that simply isn't realistic. For most workers today, 65 to 69 is the target range, but many idealistic millennials are setting their sights on a closer finish line. Twenty-one percent of millennials plan to retire between the ages of 60 and 65, according to a recent T. Rowe Price survey, and 22% intend to retire at 59 or earlier.
With diligent saving and a clear plan, this may be possible for some, but the majority of these millennials will have to prepare themselves for a few extra years in the workforce. Here's a closer look at why and how you can keep yourself on track for your retirement goals.
Millennials aren't saving enough
T. Rowe Price asked participants how much of their income they were saving for retirement. An impressive 20% said they were contributing 15% or more of their income, which is more than the Gen Xers surveyed could say, but 49% of millennials said they were only saving 6% or less of their salaries per year.
How much that adds up to depends on income, but let's consider the average millennial. The median millennial household income was $69,000 in 2017, according to the Pew Research Center. Keep in mind this is household income and in approximately 44% of the households surveyed, this included two incomes. If the household is saving 6% of its income annually, that amounts to $4,140 per year. Over 30 years, that could grow to $391,068 with a 7% annual rate of return.
It may sound like a lot, but it falls far short of what millennial retirees will need. The average retired couple today spends approximately $46,000 per year, according to the latest data from the Bureau of Labor Statistics. Over the average 18-year retirement, that adds up to $828,000. For millennials, that number will be even higher because inflation is going to continue eroding the value of the dollar. Depending on who you count as a millennial, this age group has 27 to 40 years left to save before they hit 65, but even 40 years of savings will only leave them with about $826,000 if they're saving at the same rate listed above. Based on these numbers, it's highly probable that some millennials will be working into their 70s if they don't step up their savings.
Longer retirements require larger nest eggs
Even if they don't retire before 65, millennials are likely to have longer retirements than many generations prior simply because people are living longer. The Social Security Administration previously estimated that one in four 65-year-olds retiring today would live past 90 and one in 10 would live past 95. Today, those estimates are one in three and one in seven, respectively. If that trend continues, it's possible that some millennials may need retirement savings to last 30 years or more. The estimate above is for an 18-year retirement. It's very likely that you'll need $1 million or more to cover a retirement that lasts more than 20 years.
The millennials hoping to retire before 65 will be stretching out their retirement even further. This drives up the amount they need to save to carry them through the rest of their lives, and it also creates a unique problem for those retiring before 59 1/2, the age when you can start accessing your retirement funds without penalty. If you withdraw money from these accounts before this age, you'll pay a 10% early withdrawal penalty, unless it's for a qualifying reason like a first-home purchase.
Millennials retiring before 62 also won't be able to rely on Social Security yet, and those who retire before 65 will need to purchase their own health insurance until they're eligible for Medicare. This can get expensive and unless you have substantial savings outside of retirement accounts, you won't have any way to pay for your living costs during this time other than to continue working.
Choosing a realistic retirement age
If you don't want to risk running out of money in retirement, you need to figure out when you can afford to retire based on your current savings rate. Then, make adjustments if you're not happy with that date.
Estimate the length of your retirement by subtracting your preferred retirement age from your estimated life expectancy. Then, calculate your expected annual living expenses in retirement, including food, housing costs, insurance, and taxes. Multiply this by the number of years of your retirement to get your total retirement costs, adding an annual 3% to account for inflation. Then, subtract any money you expect to receive from Social Security, a pension, or an employer 401(k) match to figure out how much you need to save on your own. A retirement calculator can do this for you and help you figure out how much you need to save each month to hit your goal.
If you can't save enough each month to retire at your target age, you have a few options. You could look for ways to boost your income, like pursuing a promotion or raise at your job, or starting a side hustle. You could cut your expenses today to free up more money for saving. You could also delay your retirement by a few years or plan to cut your retirement expenses by traveling less or downsizing your home.
Whichever approach you take, you need to be confident that you'll have enough money to last. You don't want to rush into an early retirement only to run out of savings in your 80s with 10 more years of life still ahead of you. You may not want to spend more time in the workforce, but it really is the lesser of two evils.