A recent report has debunked the stereotype of supposedly irresponsible millennials and Gen Xers, revealing that they are better prepared for retirement than their baby boomer counterparts. The study, backed by credible statistical data, sheds light on the evolving financial habits of different generations and challenges preconceived notions.
Millennials and Gen Xers, often criticized for their spending habits, have emerged as unexpected leaders in retirement planning. The statistics indicate that a significant percentage of individuals from these generations have taken proactive steps to secure their retirement. Here’s how they did it and how you can follow their steps.
How Millennials and Gen Xers Are Actually Prepared for Retirement
This discovery by investment advisor Vanguard contradicts years of economic research forecasting that millennials would face greater financial challenges compared to preceding generations. Younger generations have navigated through a series of economic upheavals, including the 2007 financial crisis coinciding with their entry into the workforce, the formidable housing market conditions that have made homeownership elusive for many, and another economic downturn during the pandemic.
Despite these challenges, financial advisors interviewed by Fortune argue that the improved state of retirement readiness among millennials stems from decades of new regulations facilitating their ability to save for retirement. This is particularly evident when comparing the current landscape to the conditions faced by baby boomers entering the workforce roughly four decades ago. “It’s funny, I’ve always said that the younger generation has really got it going on,” says Steve Azoury, an independent financial planner from Troy, Michigan.
Great News for Young Saves: A Better Retirement
The research focused on a limited age range within the millennial, Gen X, and boomer cohorts, as examining the entire span of each generation, which spans approximately two decades, would have posed challenges in accurately forecasting, explained Fiona Greig, the global head of investor research and policy at Vanguard and a coauthor of the study.
The study specifically delved into financial holdings like stocks, cash, and bonds, excluding housing—a substantial component of an individual’s net worth that could be utilized for retirement.
Surprisingly, one of the factors contributing to the better preparedness for retirement among younger generations is their access to more sophisticated resources and improved investment opportunities in retirement plans, as noted by Greig.
The advent of the modern-day 401(k) retirement accounts in 1978, backed by legislation from Congress, marked a shift from the previous pension system where employers provided pensions to retired workers. With people living longer, changing jobs more frequently, and unions losing influence, companies became less inclined to fund retirement for former employees.
How to Improve my Retirement Savings Like Millennials and Gen Xers Did
- Start Early and Be Consistent: The power of compound interest is amplified when you begin saving early. Consistently contribute to your retirement accounts to benefit from long-term growth.
- Maximize Employer Contributions: Take advantage of employer-sponsored retirement plans, such as 401(k) or 403(b). Contribute enough to secure the maximum employer match, as this essentially provides free money towards your retirement.
- Diversify Investments: Opt for a diversified investment portfolio to mitigate risks. A mix of stocks, bonds, and other assets can enhance your potential returns while safeguarding against market volatility.
- Contribute to IRAs: In addition to employer plans, contribute to Individual Retirement Accounts (IRAs). Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals in retirement.
- Budget Wisely: Track your expenses and create a realistic budget. Identifying areas where you can cut costs allows you to redirect those funds into your retirement savings.
- Take Advantage of Catch-Up Contributions: Individuals aged 50 and older can make additional “catch-up” contributions to retirement accounts. This allows for accelerated savings as retirement approaches.
- Consider Health Savings Accounts (HSAs): If eligible, contribute to an HSA. These accounts offer triple tax benefits, serving as a valuable tool for covering medical expenses in retirement.
- Stay Informed and Adjust: Keep abreast of changes in tax laws and retirement regulations. Regularly review and adjust your savings strategy based on your evolving financial situation and market conditions.