Why millennials’ retirement outlook may be worse than those of older generations

Millennials’ retirement prospects seem rockier than those of older generations of Americans.

That’s largely a function of long-term policy changes — like a later age for full Social Security benefits and a shift to 401(k)-type plans — longer average lifespans and a bigger student debt burden relative to cohorts like Generation X and baby boomers, according to retirement experts.

However, there’s room for optimism because younger households have some advantages that may allow them to make up lost ground.    

“Millennials are behind,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. “But they have time to catch up, too.”

Millennials, a cohort born from roughly 1981 to 1996, are the nation’s largest adult generation. They’ll be 28 to 43 years old this year.

By comparison, individuals in Gen X were born from 1965 to 1980, and baby boomers from 1946 to 1964.

About 38% of early millennials (those born in the 1980s) will have “inadequate” retirement income at age 70, according to projections from a 2022 Urban Institute study.

By comparison, 28% to 30% of early and late boomers and 35% of early Gen Xers are projected to have inadequate income, according to the study. It measures income from Social Security, other government cash benefits, earnings, pensions and 401(k)-type plans.

“We do see the retirement outlook deteriorating for future generations,” including millennials, said Richard Johnson, director of Urban’s retirement policy program and co-author of the report.

The Urban study measures income inadequacy in two ways: either an inability to replace at least 75% of one’s pre-retirement earnings (i.e., a decline in living standards), or income that falls in the bottom quarter of the annual U.S. average wage (i.e., not being able to meet basic needs), Johnson said. It assumes all cohorts will get full Social Security benefits under current law.   

Early millennials of color, those who aren’t married, and individuals with little education and limited lifetime earnings are in an “especially precarious” position, according to the Urban report.

A 2021 paper by the Center for Retirement Research at Boston College had similar findings.

While millennials look like boomers and Gen Xers in many ways — they have comparable homeownership, marriage rates and labor-market experience at similar ages, for example — they’re “well behind” on total wealth accumulation, CRR said.

For example, millennials ages 34 to 38 have a net-wealth-to-income ratio of 70%, much lower than the 110% and 82% for Gen X and late boomers, respectively, when they were the same age, according to its report. Likewise, net wealth for 31- to 34-year-olds is 53% of their annual income, versus 76% and 59% for similarly aged Gen Xers and boomers, respectively.

The primary reason for the wealth gap: student loans, CRR found.

More than 42% of millennials ages 25 to 36 have student debt, versus 24% of Gen Xers at that age, according to a 2021 EBRI study.

Household wealth for the typical millennial household was about three-quarters that of Gen X at the same ages ($23,130 vs. $32,359, respectively), despite millennials having more home equity and larger 401(k) balances, EBRI found.

“Student loans are really taking a dent out of [millennials’] net worth,” said Anqi Chen, a co-author of the 2021 CRR report and the center’s assistant director of savings research. “It’s unclear how that will play out in the long run.”

To that point, 58% of millennials say debt is a headwind to saving for retirement, compared to 34% of boomers, for example, according to an annual poll by the Transamerica Center for Retirement Studies.

Millennials have other disadvantages compared to older generations.

For one, longer lifespans mean they must stretch their savings over more years. Out-of-pocket healthcare costs and those for services like long-term care have spiked, and they’re more likely to have kids at later ages, experts said.

Further, while older workers with access to workplace retirement plans relied on pension income, workers today (especially those in the private sector) largely have 401(k)-type plans.

“Pensions started to go away in the mid-’90s, when Gen Xers were just starting in the workforce and millennials were still in grade school,” Copeland said.

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Pensions give a guaranteed income stream for life, with contributions, investing and payouts managed by employers; 401(k) plans offload that responsibility onto workers, who may be ill-equipped to manage it.

In 2020, 12 million private-sector workers were actively participating in pensions, while 85 million did so in a 401(k)-type plan, according to EBRI. 

While workers can potentially amass a larger nest egg with a 401(k), the “big issue” is that benefits don’t accrue automatically as with a pension, Copeland said.

“The old pension system didn’t work for everyone,” Johnson said. “But it did provide more security than the 401(k) system does today.”

Meanwhile, the last major Social Security overhaul, in 1983, gradually raised the program’s “full retirement age” to 67 years old. (This is the age at which people born in 1960 or later can get 100% of their earned benefit.)

That increase, from age 65, delivers an effective 13% benefit cut for impacted workers, according to the Center on Budget and Policy Priorities.

Congress may deliver more benefit cuts to shore up Social Security’s shaky financial footing; such reductions would likely impact younger generations.

Of course, millennials also have advantages that mean today’s gloomy retirement prospects won’t necessarily become reality.

For one, while millennials shoulder more student debt, they’re also more educated. That will make it easier to save for retirement, according to a Brookings Institution report. Higher educational attainment generally translates to higher wages; higher earners also tend to save more of their income, be healthier, and have less physically demanding jobs, it said.

Pensions also generally incentivize retirement at a relatively early age, meaning 401(k) accountholders may stay in the workforce longer, making it easier to finance their retirement, according to the report’s authors, William Gale, Hilary Gelfond and Jason Fichtner.

401(k) plans are also adapting to boost participation and savings for covered workers.

For example, automatic enrollment and automatic contribution increases have grown more popular with employers. A recent law, Secure 2.0, also made it easier for workers to receive a 401(k) match from their employer while paying down student debt.

Vanguard Group, an asset manager and retirement plan provider, found that 401(k) enhancements have helped put a subset of millennials (age 37 to 41) ahead of older cohorts in retirement preparedness. For example, the typical “early” millennial is projected to replace 58% of their job earnings with retirement income, relative to 50% for late boomers (age 61 to 65), according to a recent Vanguard report.

So, while there’s cause for concern, there’s also room for optimism, experts said.

“You’re not really going to know for 40, 50 years” how this played out, said Copeland.

Young savers who feel behind on building their nest egg should try increasing their savings incrementally, according to Sean Deviney, a certified financial planner based in Fort Lauderdale, Florida.

The goal is to eventually save at least up to your full company matching contribution; retirement planners generally recommend contributing at least 15% of pay to a 401(k), between a worker’s and company’s contribution.

Savers who can’t do that should start small instead of forgoing saving entirely, Deviney said.

“Even if you just start with 1% of pay — one penny on every dollar — it starts that automated savings process for you,” Deviney said. “If you do it in small steps, it’s much easier than trying to do some massive change.”

Automate savings to the extent possible so it’s on auto pilot, such as by turning on a function that automatically escalates savings by 1% or more each year, he added.

However, households should generally first prioritize paying down “bad” debt like credit card bills, which carry a high interest rate, Deviney said. Build up a few months of emergency savings and make sure you’re not spending more than you make each month; otherwise, households may more readily turn to credit cards to fund their lifestyle.

Further, don’t forgo your retirement savings to save for a child’s college education, he said. There are many ways to fund education — grants, scholarships and loans, for example — but “not a lot of ways to fund your own retirement,” he said.