Wealth Challenge

Millennials: Planning for the Unexpected

Today’s 25- to 34-year-olds face increasing obstacles when it comes to saving for retirement. Despite being collectively more highly educated than other generations, millennials are inheriting a fast-changing world that is already cluttered with challenges: onerous student debt; global competition for the best jobs; below-trend wage growth; and rising pressure on the federal government to curtail Social Security.

Moreover, as they age, many Millennials may be stung by life events that could stall or derail their savings plans, underscoring the need to start saving now.

“More than three-quarters of adults in their 50s experience job layoffs, widowhood, divorce, health problems or the onset of frailty among parents or in-laws,” says Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and author of the report: The Millennials. Short of inheriting a windfall, Millennials who want to sustain their current lifestyles in retirement will have to start saving by age 25, making significant contributions of pre-tax income to a diversified retirement account.

If everything goes according to plan

Millennials who contribute 7.5% to 8.0% of pre-tax income to retirement accounts each year, starting at age 25, will be on solid ground by their mid-60s—especially when employer 401(k) contributions (typically capped at 3%) and Social Security payments are factored in.

When life intervenes

Millennials hit with family emergencies, spells of unemployment, long-term-care expenses, college tuition bills and other life events that foil savings plans may be forced to make tough choices:

  • Slash spending, perhaps by as much as 35% or 45% in retirement, in real terms, compared with pre-retirement levels.
  • Work longer, perhaps until age 70 or 71, to gain time to accumulate more savings and defer drawing down retirement assets (provided they are physically able to keep working and able to find employment opportunities).

Investing is not a way out

An equity portfolio would have to generate a real 9% annual compound rate of return every year from 25 through retirement age for this strategy to succeed.

“Unfortunately, this level of performance is more than any recorded long-term, post-war equity market index return,” Cembalest says.

The hard reality: Long-range planning, aggressive saving and disciplined investing are essential to realizing retirement plans 25 or 30 years from now.

“Putting 9% to 14% of pre-tax income in diversified retirement accounts each year and saving an additional 2% of annual after-tax income is a good starting place,” says Cembalest. “Such a plan would help maintain financial independence and possibly prevent having to make deep, unexpected reductions in retirement spending.”

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