The Great Recession certainly did a number on Baby Boomers. With the market hitting new highs in 2007, right when baby boomers were getting ready to hang up their coats and gloves for good, the floor fell out from underneath the housing and credit markets, ruining the retirement dreams of millions of Americans.
But it's not just the boomer generation that's felt the ramifications of the Great Recession. Millennials, or Americans born between 1980-2004, are facing a series of challenges that could make retiring comfortably, and on their own terms, extremely difficult.
Here are five reasons millennials may ultimately struggle to retire on their own terms.
1. Poor financial literacy
Arguably the biggest dilemma our nation's young adults face is their lack of financial knowledge. A five-question multiple choice quiz from the Financial Industry Regulation Authority, which you can take here to test your own knowledge, asked survey-takers basic financial questions pertaining to the concepts of interest, inflation, mortgages, and stocks. A score of four or five out of five would be considered optimal, while three and below would be construed as worrisome.
In 2014 when FINRA reported the results of its test, just 18% of young millennials, aged 18-26, answered four or five questions correctly, while 30% of older millennials (ages 27-34) answered four or five correctly. If millennials fail to grasp basic financial concepts, they'll be far less likely to diligently save and invest for their retirement.
The solution: Millennials need to be proactive about their financial education, as it's no guarantee that high schools or college settings will teach them the basics of managing, saving, and investing money. Seeking out basic financial information over the Internet -- you'll find plenty at The Motley Fool -- and talking with your family are two great ways of proactively boosting your financial knowledge.
2. Crippling student loan debt
Another concern with the millennial generation is their thirst for knowledge in the post-secondary education setting. Today's job market has made it such that college is no longer an exception to the rule as it was in the 1960's, but is instead a practical requirement if you want any opportunity of economic advancement. According to data from The White House, postsecondary degrees for people ages 25-34 have risen from 30% in 1992 to 47% in 2014. But, financing that education is a problem.
Millennials are absolutely drowning in student loan debt. Total student outstanding loan debt rocketed past $1 trillion (yes, with a "t") in mid-2014, with both the need for financial aid to lower-income families and the rising cost of postsecondary education doing a number to millions of college graduates. Overall, about half of all students graduate with student loan debt, up from roughly 30% in the mid-1990s, with the average student loan debt upon graduation equal to $30,000 as of 2012.
The solution: Data from the Pew Research Center shows that going to college can equal a substantial increase in lifetime pay, so simply not going to college is probably a bad choice. Instead, consider going to a local college in order to avoid high out-of-state costs, make sure you apply for all potential scholarship opportunities, and focus on a major where there's strong job growth for when you graduate so it's easier to find a job and begin paying back your student loans.
3. Record-low interest and savings rates
In response to a struggling economy, the Federal Reserve slashed its federal funds target to 0.25%, where it's remained for about six years. While a low federal funds target is great news for borrowers, and it's certainly provided an impetus for businesses to borrow and hire, it's been a death knell for investors looking for fixed-income ideas, such as bonds and CDs. It's also discouraged saving among America's young adults, which is a problem since time is their greatest ally.
Based on 2014 data from Moody's Analytics, the savings rate for people aged 55 and up was 13%. By comparison, the millennial generation had a savings rate of – drumroll please – negative 2%. That's right, the millennial generation, thanks to debt, is spending more than it's earning, thus negating any chance of saving money.
The solution: There's a two-pronged approach millennials should take here. First, even if it's a rough outline, millennials should create and adhere to a budget. Until millennials really have a grasp of their cash flow, they won't be able to consistently sock away money for retirement and emergencies.
Secondly, millennials need to use time to their advantage and consider investing in the stock market, which has outpaced fixed-income securities over the long haul. A Capital One ShareBuilder survey from March shows that 93% of millennials have a distrust or insufficient knowledge about investing that makes them want to avoid the market altogether. But avoidance is a bad move with the indexes returning an average of 8% per year over the long-term.
4. Stagnant wages
Another reason millennials have struggled to put money into their savings account is stagnant, or perhaps even declining, real wage growth since the recession.
According to data from the Current Population Survey, which looked at interest-adjusted wages between 2007-2013 for millennials ages 25-34, all major industries except for healthcare have witnessed a real wage decline (and even healthcare increase barely registered above the flat-line). Retail and wholesale wages are off around 10% since the recession, while leisure and hospitality real wages dropped roughly 14%!
Why the drop in wages? It's a combination of factors that includes little need for business to boost starter wages in still recovering industries (i.e. leisure and retail), higher employer health insurance costs for employees, thus negating any would-be real-wage hikes, and a combination of outsourcing and software automation which can reduce the need for living, breathing employees.
The solution: Again, make your major and your job field count. Businesses are big on specialization these days, thus it's important to pay attention to what jobs and industries are doing the most hiring. The rules of supply and demand are especially important in the jobs market, meaning if there's a job shortage in a growing field, like healthcare, and you have the specialized skills to fill that role, you could hold substantial wage bargaining power.
5. Social Security dilemma
Finally, by the time millennials begin hitting their full retirement age in about 30 years, the financial backdrop known as Social Security may not be able to protect them as well as it did their grandparents.
Designed to provide income to retirees, the disabled, and eligible survivors, the Old-Age, Survivors and Disability Insurance Trust, collectively known as the OASDI, is on pace to run out of its cash reserves by 2033. This doesn't mean the OASDI will go bankrupt, but it does mean that a benefits cut would be in order for income payments to continue. This cut, assuming Congress does nothing to "fix" Social Security between now and 2033, would be equal to 23%. In today's dollars, based on the average monthly benefits check given to retirees, a 77% benefits payout would equal roughly $1,020. If millennials are counting on Social Security to provide a majority of their income in retirement, they could be in for a rude awakening.
The solution: It's important that millennials don't rely on Congress to pass legislation to fix Social Security, but instead remain proactive with regard to saving and investing for their future.
Right now a Roth IRA is a fantastic tax-advantaged retirement tool millennials can use to supercharge their retirement. Contributions, which can total up to $5,500 per year (although income restrictions do apply), don't have an upfront tax benefit, but as long as you don't make any unqualified withdrawals, your money will be able to grow completely free of taxation over the life of the account.