How Millennials Are Building Better 401(k) Accounts Than Older Workers

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Millennials lag older workers in certain key measurements of 401(k) account usage. For one, only 59.4% of millennials have an account vs. 63.6% of Gen Xers and 66.1% of baby boomers. But millennials are leaders in what may be the single most important trait. As a group, they are on track to replace a higher portion of their pre-retirement income once they retire.

Millennials are building their 401(k) accounts fast enough and big enough to duplicate 66% of their pay if they quit work at age 65 and start to take Social Security benefits, according to a study by a unit of Wells Fargo. The financial firm runs retirement plans, like 401(k)s, with 4 million members.

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Wells Fargo's income-replacement forecasts also assume that workers in plans run by the firm get pay raises of 2% a year, that investment returns average 7% yearly before retirement and 4% after retirement, and that inflation averages 3% a year in retirement.

Wells Fargo says the 401(k) balance must be big enough to last 20 years.

Members of Generation X are on schedule to replace just 51% of their pre-retirement income. And baby boomers are positioned to replace merely 41% of their pre-retirement income with 401(k) assets.

Replacing Pre-Retirement Income

For members of each generation, the replacement-income ratio includes estimated Social Security benefits, but it does not include other income from other sources. Income from traditional pensions, for example, would further boost individuals' gross income-replacement ratios.

Millennials are on track to replace more of their pre-retirement pay mainly because millennials have more time to prepare. "Our biggest message with this study is this: Time is your best asset; leverage it to your fullest extent," said Joe Ready, head of Wells Fargo Institutional Retirement and Trust.

In the study, millennials are people who are now 24 to 40 years old. Gen Xers are 41 to 52. Boomers are 53 to 71, with some having already retired.

Another reason that millennials tend to be on track to replace more of their pre-retirement income is that a smaller percentage of millennials have eroded their retirement nest eggs by taking loans. Just 16% of millennials have loans vs. 25% of Gen Xers and 19% of boomers.

Millennials' higher replacement ratio is all the more impressive because millennials contribute a smaller portion of their salaries to their 401(k) accounts on average. Millennials kick in 5.6% of their pay. Gen Xers sock away 6.8%. Boomers are the most avid savers, having worked their way up to an 8.5% of pay average.

"We recommend that people aim for at least a 10% contribution rate," Ready said. That contribution includes any company match.

Beefing Up Retirement Readiness

Millennials show several signs of eagerness to improve their retirement account readiness.

For one, the percentage of millennials participating in 401(k) plans is rising faster than it is for other generations. Millennials' participation rate rose 13.3% over the five years ended last Dec. 31. It rose only 11% for Gen Xers and just 8.3% for boomers.

In addition, millennials tend to be invested more aggressively than other generations. Fifty-five percent of them have a higher percentage of stock exposure through mutual funds and similar investments than a typical age-appropriate target-date fund does.

Who Is Wary Of Stocks?

Gen Xers are more stock averse, with only a 42% of them invested more aggressively than a typical age-appropriate target-date fund. And 52% of boomers are invested aggressively.

Further, millennials' retirement income will be boosted by the fact that a higher percentage of them use Roth 401(k) accounts, which will provide them with tax-free withdrawals. Only 11% of Gen Xers use Roths, and just 8% of boomers do.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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