Many Americans don't even think about planning for their retirement until they hit their 40s or 50s, figuring they'll have plenty of time to deal with their post-career finances later in life. One justification for not giving retirement planning a higher priority is that Social Security benefits have historically covered a substantial portion of a retiree's needs. The millennial generation, however, has a less optimistic view of Social Security's prospects, and so it's increasingly critical for young adults to start thinking about planning for retirement as early as possible to account for every Social Security contingency.
Why Social Security is so important
Retirees today rely on Social Security for a huge portion of their financial well-being. A typical single retiree can expect to receive $230,000 in Social Security benefits over the course of a lifetime, according to a study published in The Journal of Retirement. For couples, the corresponding figure is $470,000. High-income families can expect to get even more, with the typical upper-income single recipient receiving $390,000 in all and couple weighing in at $710,000.
In part because of these high levels of benefits, many current retirees don't get much income from sources other than Social Security. More than half of all married couples and almost three-quarters of unmarried recipients get at least half of their retirement income from the federal program. Many Social Security recipients are almost entirely dependent on the program, with nearly a quarter of married couples and almost half of all single recipients getting 90% or more of their income from their benefit payments.
But millennials aren't even sure that Social Security will be around at all by the time they retire. One recent poll showed that less than half of millennials ages 18 to 29 believe Social Security will be there when they need it to provide financial support at any level. Even among those who believe Social Security won't disappear entirely, only about a third think they'll get benefits similar to what current retirees receive.
Fears that Social Security will vanish are largely unfounded. Even under projections from the Social Security Trustees, Social Security should still be able to fund about three-quarters of future benefit obligations after the Trust Fund runs out of money. Nevertheless, just that small reduction could leave today's millennials having to make up tens or even hundreds of thousands of dollars in lost benefits over the course of their lifetimes.
Millennials' biggest asset
Given those financial challenges, the one thing that millennials have working for them is that they have a long time to plan for their retirement, with anywhere from 35 to 50 years before reaching typical retirement age. For those who want their own alternative to Social Security, investing today can help them replace lost benefits -- or supplement any benefits that will be available in the future.
Accomplishing that feat means accounting for inflation. To generate a nest egg big enough to produce $230,000 in current purchasing power, even a modest 2% inflation rate would require that you have about $460,000 in 2049, or $620,000 in 2064.
That seems like a huge amount. But with so much time left, you can rely on compound returns to do most of the work for you. Millennials who save just $200 per month and earn an 8% annual return could produce a $460,000 nest egg within 35 years. Given a 50-year time span, saving just $80 per month would get a current 18-year-old beyond the $620,000 mark by retiring at 68.
Even if you don't have enough available money to finance the full amount, putting a portion of that $80 or $200 aside each month will give you a valuable start on your goal. You'll eventually have to boost your monthly savings beyond those figures to make up for lost time, but the amount by which you'll have to increase your savings won't be nearly as great as if you'd done absolutely nothing early in your career.
With all the negativity surrounding Social Security, millennials are justified in believing younger Americans shouldn't rely on the program. That just makes it more critical for young adults to think about retirement planning even earlier. That way, you'll never be in a position in which you are relying on income from a source that no longer can help you.