Personal Finance

Millennials aren’t earning as much as parents — but will have to save twice as much

Millennials will have to save lots more for their retirement because of sub-par stock market returns.
Millennials will have to save lots more for their retirement because of sub-par stock market returns. File

Sorry, millennials, but 2017 hasn’t delivered particularly good economic news for you. First you find out you’re not earning as much as your parents, the baby boomers, did at the same age. And now financial advisers are warning you to double down on your retirement savings if you ever want to call it quits.

As projections of a meh stock market drift in, the money folk say workers may find their retirement portfolios aren’t returning as much as they did for previous generations. For those 18- to 35-year-olds decades away from retirement, advisers say it might be wise to save lots more — almost a quarter of your paycheck, in fact — to make up the difference.

Wall Street analysts are turning bearish, predicting the Standard & Poor’s 500-stock index will gain 4 percent on average in 2017 — the lowest expected annual gain for the stock market since 2005, according to an analysis by Bespoke Investment Group. Others concur.

Consulting firm McKinsey has said U.S. stocks would likely not match past performance of 7.9 percent, the average between 1985 and 2014. Financial firm GMO also has announced it expects U.S. stocks to drop by an average 3.6 percent a year for the next seven years, and Vanguard founder John Bogle has warned that returns will be lower over the next decade.

Such low returns, especially over a period of years, usually mean retirement savers must save more and work longer to make up the potential shortfall.

“Realistically, most people who are reading this article probably should expect to work a little bit longer than their parents did,” Tim Koller, a partner with McKinsey, told the Washington Post.

The math doesn’t lie: Even a small dip in returns can affect a portfolio in unwanted ways.

Over the past century, stock markets — both in the U.S. and abroad — have gained an average of 8.6 percent a year. In this climate, a 25-year-old worker could squirrel away 6.3 percent of pay for a comfortable retirement. But when those returns fall by a mere two points, that same 25-year-old would have to sock away double to make up the difference.

So what do those predictions mean in real life budgeting terms? While advisers suggest saving 10 to 14 percent of pay, millennials would have to amp retirement savings by putting away 22 percent of paycheck, according to financial website NerdWallet.

Millennials have proven themselves good savers, though. When they have access to defined contribution plans, the average millennial begins saving at the age of 23 instead of age 27 for for Generation X and age 31 for baby boomers. according to a recent study on retirement savings. Motivation? Many believe Social Security won’t be around when they need it.