The good news about Millennial savers is that nearly two-thirds (63%) are saving something, according to a recent survey of 25- to 35-year-olds by The Principal Financial Group. The bad news? Only one in three are saving the 10% of income that they will likely need to fund a comfortable retirement.
By any measure, Millennials are doing well at coming up with excuses for not saving, however. The 850 Millennials polled in early 2015 for The Principal survey cited numerous obstacles to saving more, including competing expenses such as mortgage or rent (65%), food (38%) and automobile and transportation expenses (30%). Additionally, 20% said student loan payments were their largest single expense.
Financial experts who deal with Millennials report hearing a similar set of excuses. The most common excuse heard on the street, however, is that with retirement decades away, it's too early to begin saving. “Their problem is they think they have plenty of time,” says Dave Hardin, president of Hardin Financial in Troy, Mich. “They say, ‘I’m young. I can worry about this in 10 years or 20 years. I’ll start saving then.'”
To encourage Millennials to overcome their foot-dragging, Hardin and others experts stress the importance of compound interest. One frequently used concept is the fact what, with the help of compound interest over decades, a Millennial who begins saving at age 25 and stops a decade later at age 35 will have more at retirement than someone who doesn’t begin saving until 35 but keeps putting money away until retirement.
Starting early by saving a small amount regularly is better than saving a lot later on, according to Mich Wells, who educates retirement plan participants for Ubiquity Retirement + Savings, a San Francisco-based retirement plan provider. “People focus on the amount of money being saved as the most important variable," Wells says. "In reality, time is the most valuable asset. With the way that compound interest works, you want to start saving as early as possible.”
Chris Hogan, a Nashville-based financial coach and author of Retire Inspired, says he often hears that student loans are keeping Millennials from retiring. He counters that saving a very modest amount is better than ignoring saving in order to pay off student loans or other debts. Hogan suggests Millennials cut expenses to free up money to pay off debt and save at the same time. “Then I want them to generate extra income to pay toward the debt,” Hogan said. “Maybe they take on a second job.”
Another common excuse is that Millennials, recalling the 2007 to 2009 bear market, don't trust investing their money. The issue here, according to the experts, is lack of understanding about stock market volatility. “I let them know that when you invest, there are going to be some ups and downs,” Hogan said. “I tell them you have to understand what you’re buying and you have to understand your risk tolerance.”
Millennials also complain that saving is confusing and too much trouble, Wells said. But they can often simplify adequately -- while also dealing effectively with risk worries -- by accepting the default choice for investments in their employer plans. A broad-based diversified fund likely handle to be able to market ups and downs as well as can be expected, is often the default choice, she said. It’s also easy. “You can hit that default fund and in two minutes you’re done,” Wells said.
Millennials give many other excuses for not saving, including that their employer doesn’t match funds placed into a retirement plan. But no matter what excuses they offer, Wells says educating them about the process can change their minds and their behaviors. After employees attend seminars about their company retirement plans, she says enrollment rates in those plans climb about 11 percentage points to the low 60s.
“I teach them about compound interest,” Wells said. “Time is your most valuable asset when it comes to utilizing this asset and saving for retirement.”