Personal Finance

Millennials May Be Sabotaging Their Own Retirement, New Study Shows

Worried Millennial Woman Holding Piggy Bank Getty
Worried Millennial Woman Holding Piggy Bank Getty

Saving for retirement is supposed to be pretty straightforward. We budget our money, set aside some for investment purposes, and watch it compound for decades. Eventually we retire on a beach somewhere and drink mimosas till sunset.

Unfortunately, real life tends to rarely provide a straight and narrow pathway to the retirement finish line. Curve balls are constantly thrown into the mix which can derail out saving and investing efforts and push our retirement dreams out of reach.

Yet according to a new study released by Financial Finesse earlier this week, Americans' state of retirement preparedness really depends on what generation they belong to.

How prepared are you to retire?

Financial Finesse's study is based on its proprietary Wellness Score, which it defines as "a state of financial wellbeing where employees have minimal financial stress, a strong financial foundation, and a plan in place to achieve key financial goals." After analyzing the Wellness Scores, which range from 0 to 10, of around 35,700 people between Jan. 1, 2014, and Dec. 31, 2015, Financial Finesse's results showed a distinct generational trend.

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Baby boomers, defined as people aged 55 and up, were the strongest generation in terms of financial wellness, with a score of 5.7. Nearly four out of five baby boomers had basic investment knowledge, and half had run a retirement calculator to determine how much money they'd need in retirement. Of course, this doesn't mean all boomers are necessarily prepared to retire, as many are dealing with insufficient savings and high debt levels . But in terms of financial wellness, the boomer generation is the king of the hill.

On the other end of the spectrum are millennials, which are defined as being under the age of 30. According to the study, millennials have a Wellness Score of just 4.4. Any score between a 3.0 and a 4.9 demonstrates that "employees may be sabotaging their own goals through poor personal financial skills and are in need of more basic information."

Millennials have some work to do

Financial Finesse's data uncovered a lot of terrifying data points for millennials.

  • Just 59% understand the basics of investing (down 4% from last year).
  • Only 32% know their investment risk tolerance (down 5% from last year).
  • Almost a quarter (24%) have 15% or more of the wealth in a single position (up 9% from last year).
  • And only 23% have used a retirement calculator (up 1% from the prior year).

Financial Finesse narrowed down the struggles of millennials to two key biases -- present bias and exponential growth bias -- which tend to work hand-in-hand. The study finds that millennials generally prefer present day satisfaction over future satisfaction, which impacts the ability and desire to save for the future. Additionally, they neglect the value of compounding which builds wealth over time, thus hurting their chances of retiring on their own terms.

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Specifically, there needs to be a focus by millennials on longer-term investing and in understanding their risk tolerance. The fact that 68% didn't know their investing risk tolerance suggests that many millennials are stuck in a short-term mind-set. If we remove our short-term goggles and look at the broad-based S&P 500 over the past 66 years, we'd see an index that's undergone 35 stock market corrections of at least 10%. But we'd also seen an index that has completely erased all 35 of those aforementioned downtrends within a matter of weeks, months, or years, thus demonstrating the long-term appreciation potential of stocks. With an average annual return, including dividends, or around 7%, investing in stocks could allow millennials to double their money many times over.

Lastly, more millennials need to be taking advantage of tax-advantaged retirement tools. Don't get me wrong, I was pleased to see that 73% of millennials in 2015 were contributing to a retirement plan, and that 80% of those were capturing matching funds in an employer-sponsored plan. This is a good foundation, but it can still get much better.

Obviously, matching up to your employer contribution is almost always going to be a good move, because it's essentially free money. But a Roth IRA can be an even smarter move for millennials. According to Financial Finesse, just 36% of millennials were taking advantage of what can arguably be described as America's top retirement tool , the Roth IRA. A Roth IRA has a lower annual contribution limit than an employer-sponsored 401(k), but investment gains within a Roth IRA are free and clear of taxation as long as you make no unqualified withdraws. A 401(k) is merely tax-deferred until you begin making withdrawals. Plus, with a Roth there are no restriction on when you have to stop contributing, and no minimum distribution requirements. You're in full control of your retirement nest egg.

Time is definitely on the side of millennials, but they clearly have some work to 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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