For the vast majority of Americans, the career "finish line" is hitting a retirement number and being able to retire on their own terms. In reality, though, hitting the finish line is getting increasingly tough. Instead of the road to retirement being a straight line from Point A to B, it's often filled with twists and turns.
Unexpected expenses and other rising costs are making the trek to retirement quite the challenge, according to NerdWallet's 2015 New Grad Retirement Report. Based on three key findings, the graduating class of 2015 faces the very real possibility that they may not retire until the age of 75. By comparison, the average retirement age today is 62.
How retiring at 75 could become a reality
What's pushing millenials to work until the ripe age of 75?
The first big issue is the growing amount of student debt today's graduates are dealing with. Average student debt these days is $35,051, up from $29,400 just three years prior, while starting wages are up only around $1,200 since 2012. With college becoming more of a requirement than an exception to land a job where economic advancement is possible, college tuitions have been rising at a pace that's vastly outpacing wage growth and inflation. The result is more than $1.2 trillion in cumulative student loan debt.
According to NerdWallet, the average student loan repayment plan was 10 years, amounting to $4,239 being repaid annually (including interest payments). All told, NerdWallet suggests that repaying student loans could reduce 2015 grads' nest eggs by nearly a third, reducing their lifetime investment-earning potential by more than $684,000 over a 50-year period. Since 2012 the amount in lost retirement savings has jumped by almost $124,000. In other words, instead of investing their savings and compounding their gains over time, grads will instead be diverting their money early in their working years (where it can be of the biggest benefit over the long run) to paying back student debt.
The second big issue is that rents are rising across the nation at a much quicker pace than wages. NerdWallet notes that rent prices across the U.S. are up 11% since 2012. Rising rent prices mean recent grads need to apportion an ever-greater amount of their salaries to covering basic expenses. This leaves less money for investing, and it means a potentially longer wait to retire.
Lastly, NerdWallet pinpoints a lack of trust in Wall Street and skittishness toward investing as a reason why this year's grads may have to wait until age 75 to retire. The effects of the Great Recession still ring true with today's millennials, meaning many are holding far more in cash than they should be. The result is that average annual investment returns are expected to be down, and it could take extra years for investors with a more conservative approach to reach their retirement number.
NerdWallet estimates suggest that today's grads may still be able to retire at 62, but they'd need to save 20% of their income annually and invest it as opposed to the roughly 6% that they're saving and investing today.
Change what we can control
Let's face it, we can't change what we can't control. College costs aren't likely to drop anytime soon with the importance of a college education growing, and rent prices may strengthen further as interest rates rise and potential homebuyers back away from paying higher mortgage rates. Some costs are simply beyond the control of today's grads. However, there are steps to be taken that could save grads money and help them do more with what they save.
NerdWallet has a couple of great suggestions, including living at home for as long as is reasonable in order to save on rent costs, as well as maximizing a 401(k) match through your employer. You certainly don't want to leave free money on the table, and should almost always consider contributing at least up to the donation match in your employer-sponsored retirement plan.
But there are plenty of other suggestions that could prove valuable.
For instance, how you save can make a big difference come retirement. Investing in a traditional brokerage account can expose you to taxes each and every time you sell a stock, option, or mutual fund. Although long-term capital gains taxes can be 0% for low-income individuals, you're more likely to wind up paying 15% or 20% in long-term capital gains taxes when selling long-term assets in your brokerage account.
You can completely eliminate taxes by opening up and contributing to a Roth IRA. A Roth IRA allows your money to grow tax-free over your lifetime, there are no required minimum distributions beginning in the year you turn 70 1/2 like its counterpart the Traditional IRA, and there's no point at which you are no longer allowed to contribute to a Roth IRA -- unlike a Traditional IRA, where you're no longer allowed to contribute past age 70. Not having to pay any taxes could save the theoretical investors in NerdWallet's report between $200,000 and $400,000 over a lifetime.
Another important question is what to invest in. On top of keeping your money from winding up in the government's hands, new investors have to be able to trust the stock market once more. Stocks have returned an average of 8% historically, and there will certainly be periods, such as the Great Recession, where things get a bit bumpy and uncomfortable. However, the data doesn't lie. While past performance is no guarantee of future results, all 33 stock market corrections of 10% or more in the S&P 500 between 1950 and 2014 were eventually erased by bull markets. Patience has historically paid off for long-term investors who pick out high-quality companies and hold them over the long run.
It's also not a bad idea for younger investors to consider a more aggressive investment approach that focuses on growth stocks because they have such a long period of time to correct any investment mistakes. Allowing winners to run for decades at a time is a powerful tool that can eliminate quite a few bad stock selections.
Budgeting is another important tool that today's grads are going to want to get themselves accustomed to. Far too few people have a good grasp on their cash flow, and if you don't understand how your expenses weigh on your income, then you'll have a very difficult time saving for your future. Developing a monthly budget should help boost your saving efficiency, and it'll still give you the ability to play around with the numbers to ensure you continue to live a fun life, even while budgeting for your future.
Lastly, consider monetizing your hobbies. Today's millennials really value their free time -- and their free time could actually be worth a boatload of money. Teaching guitar lessons, couponing to save at the grocery store, buying items at a garage sale then reselling them online, and pet sitting are all examples of personal hobbies that could turn into lucrative side businesses for today's grads. Plus, doing what you love certainly doesn't seem like work! Adding this extra cash to your monthly income stream could be the boost you need to move your retirement date forward.
I believe there are a lot of variables left to play out between now and when today's grads hit 75. Following these suggestions could help get today's grads back on track to retiring on their own terms.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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