BackMillennials on Better Track for Retirement Than Boomers and Gen X
Making saving for retirement the default option is proving to be a boon for nest eggs.
PremiumMillennials are on track to surpass their elders in one key source of financial security: retirement savings.
While the generation born in the 1980s and 1990s has lagged behind prior generations when it comes to homeownership and earnings, new data suggests they are saving more for retirement. By the time older millennials now earning a median salary reach retirement, Vanguard estimates, they will be able to replace almost 60% of their preretirement income with Social Security and savings from sources including their 401(k)s and individual retirement accounts.
Gen Xers and the youngest baby boomers with median earnings are, by contrast, likely to replace about half of their paychecks in retirement.
What changed? Millennials are saving more and earlier largely because contributing to a 401(k) became the default in many plans. Unlike baby boomer and Gen X workers, many of whom delayed joining 401(k) plans, millennials were often automatically enrolled earlier in their careers. While those who are swept into plans can opt out if they don’t want to save for retirement, few do.
As a result, “the retirement savings picture is getting stronger with each passing generation," said Fiona Greig, global head of investor research and policy at Vanguard Group, which released research on Tuesday comparing the retirement prospects of older millennials, ages 37 to 41, to Gen Xers, 49 to 53, and younger baby boomers, 61 to 65.
The 401(k) might be the backbone of the nation’s private retirement savings system, but even its fans say it can fall short of helping people save enough, in part because it exposes workers to big drops in the stock market and allows them to treat their nest eggs like rainy-day funds.
For those with access to 401(k) plans, especially early in their careers, the widespread adoption of automatic enrollment into target-date funds and automatic savings rate increases is helping younger workers get on track, according to Vanguard.
Among the 1,700 employers that use Vanguard’s 401(k) services, nearly 60% automatically enroll new hires, up from 10% in 2006, when Congress passed a law encouraging the practice. Many plans that auto-enroll also automatically raise workers’ savings rates, typically by 1 percentage point a year, until hitting a threshold, such as 10% of pay.
Kenneth Adams, 34, said that when he graduated from college in 2012 and began working as an engineer at a technology company, his employer automatically enrolled him in the 401(k) plan at 3% of pay.
“I wasn’t thinking about retirement at all," said the Austin, Texas, resident. “They sent me this letter saying they were going to auto-enroll me, and I said, ‘OK, I’ll do what it says to do,’" said Adams, who increased his 401(k) savings rate to 12% in 2014 after building an emergency savings account.
“There’s not that much financial education in college, which is why automatic enrollment is helpful," he said. “It gives you a default savings option until you educate yourself on what the 401(k) can do for you."
Even with automatic enrollment, Vanguard’s research indicates that most American workers aren’t saving enough to keep up with the spending typical of today’s retirees.
The exception is workers with incomes in the top 5% of the population, who in all three generations save significantly more than they are likely to spend. Millennials in that category, for example, are on track to replace 85% of their income in retirement.
Millennials who earn $61,000 are also very close to being on track to cover their projected spending needs in retirement, according to Vanguard. Baby boomers and Gen Xers with similar incomes face more significant savings shortfalls.
Lower-income workers across all three generations are likely to end up with the greatest retirement shortfalls, according to Vanguard. They are also more likely to have a job that doesn’t come with a 401(k) plan, said Greig.
Vanguard’s results are broadly consistent with findings from other research.
A 2021 study by Boston College’s Center for Retirement Research found that millennials in their mid-30s are catching up to where older generations stood at similar ages on measures including earnings and rates of homeownership. But, since millennials have more student-loan debt, they are still behind in overall wealth accumulation.
Write to Anne Tergesen at anne.tergesen@wsj.com
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