Millennials Started Saving for Retirement 9 Years Earlier than Boomers. But Is It Enough?

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  • A Schwab study shows that millennials started saving for retirement almost a decade earlier than boomers.
  • Millennials have different priorities from boomers -- they are less likely to own property, and more likely to use new technology.
  • The power of compound interest means that every year of investing can make a big difference to the total when you get old.

Millennials may have started preparing for old age earlier, but many of them worry they should spend more time managing their finances.

A recent study by Schwab showed big differences in the way millennials and baby boomers think about their golden years. Born between 1981 and 1996, the oldest millennials are now entering their 40s, meaning the prospect of retirement is inching ever closer.

The challenge is that by the time millennials retire in 30, 40, or even 50 years' time, the world will likely be a very different place. The cost of living keeps rising, our attitude toward work is changing, and millennials could be about to experience their second serious recession. So, how prepared are millennials for old age? And how much of our current thinking about financial stability and retirement planning will still apply?

Millennials value freedom over stability

The Schwab study used a mix of information, including a questionnaire, its own data, and third-party research. It showed that millennials are less likely than boomers to own homes, and more likely to pursue new experiences in later life.

Where boomers value financial stability, millennials are more likely to value financial freedom, aiming to instead use their savings to pursue their passions. Millennials are more driven by ways of using new technology, and derive satisfaction from having solid relationships rather than money in the bank. Millennials are 150% more likely to invest in cryptocurrency than boomers.

Millennials started saving for retirement nine years earlier than most boomers. But that doesn't mean they feel ready for old age. Over 40% of millennials said they'd like to spend more time on their investments. In contrast, boomers were more likely to feel they spent enough time investing their money. Plus, more than half of millennials said they frequently experienced feelings of worry, anxiety, or sadness.

Preparing for retirement, whatever age you are

You may not know what shape your old age will take. Perhaps you'll be traveling the world. Perhaps we'll all be spending our time in virtual worlds. Perhaps we'll have overcome another pandemic or climate-related issues. The world has changed so much in the past few decades, it's hard to imagine what it will be like by the time we retire.

There are no certainties, but putting money into a retirement fund now could give you the best chance to manage whatever happens as you age. Whether you're a millennial, Gen Z, or Gen X, saving money today is a gift to your future self. It might give you the freedom to be flexible and live as and where you want to. It might allow you to handle medical emergencies or longer-term health conditions while maintaining the quality of life you desire.

The earlier you start your retirement savings, the more time it will have to compound and the more it will be worth when you retire. Let's say you invest $10,000 into a retirement fund in your 20s and don't touch it until you retire. The power of compound interest means that if your money gains an average of 7% a year, that $10,000 could be worth over $200,000 when you're 70. That's 20 times what you put in. There are no guarantees, but historically, the S&P 500 has produced returns of around 9% or 10%. If you wait until your 40s to invest that same $10,000, by the time you are 70, it would only be worth around $50,000, assuming the same 7% rate.

If your employer offers a 401(k) plan, make sure you max out your contributions. Not only can you defer taxes, but if your employer matches what you put in, you're also benefiting from what's essentially free money. If that's not the case for you, look into other tax-advantaged retirement accounts such as an individual retirement account (IRA).

Bottom line

There are so many demands on our wallets each month that it's difficult to put money aside for your old age. You might think you can make up your retirement savings later in life, or decide you want to enjoy your money while you are young. But the length of time you leave money untouched to compound can have such a dramatic impact that it's worth re-jigging your budget today so you can benefit.

If you put aside a small percentage of your income every month for your whole career, you'd be amazed at how much it would be worth by the time you retire. As such, the most important piece of information in Schwab's study is that millennials started putting money aside for retirement almost a decade before boomers did. Hopefully that'll help them deal with anything life throws at them.

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