How Smart the Millennial Generation is Saving for Retirement

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How Smart the Millennial Generation is Saving for Retirement

Does it surprise you that the Millennial Generation (1980-99 birth dates) is a bigger generation than the Baby Boomers? In the United States, we have 76 million Baby Boomers and 87 million Millennials. And here’s another amazing fact. What do you think the average age in the U.S. is? Would you believe it’s 22? These facts, a conversation with a Millennial, and two reports from Dimensional Fund Advisors led me to these conclusions:

1. Millennials, now ages 15-34 are good but not genius retirement savers

2. Planning retirement savings isn’t any more critical than planning retirement consumption

3. The smartest savers, Millennials and other generations, are putting financial science to work for them

So I was at a party with a 30-year-old Millennial. He works in the actuarial department of a major international retirement company and has worked there for eight years. When I asked if he was saving for retirement he didn’t hesitate. He saves the maximum in his employer’s 401(k) plan to get a 100% match. His wife, who works in admissions at a college, also saves and plans to retire at age 56. Why am I telling you this? Because these two and millions of other Millennials are good, maybe very good, retirement savers.


Millennials Planning for Retirement 12 Years Earlier

The Transamerica Center for Retirement Studies says that Baby Boomers typically began saving for retirement at a median age of 35. Generation X (the small generation between the boomers and the Millennials) began saving at age 27. But Millennials start saving at an average medial age of 22.  That’s 12 years before the Boomers started saving. Millennials are also putting away a good percentage of their income: 8%. That’s slightly more than Generation X (7%) and less than the boomers (10%).


Will You Only Need 60% of Your Pre-Retirement Income?

Perhaps I should have congratulated my Millennial party conversationalist. But then I remembered the findings of a report by Marlena I. Lee, PhD, a Vice President at Dimensional Fund Advisors. Her report, “The Retirement Income Equation,” contains some interesting facts for retirement planners to consider. For example, when people are building their retirement fund, Marlena cites the common advice that households should plan to build a fund that will provide 75% to 85% of their preretirement income. But she conducted research that shows some people will only need 60% of their preretirement income and others may need more than 80%. Her study shows that people who are highly compensated during their earning years can sometimes meet their retirement goals with the 60%. People who are low-wage earners may need 80%.

Millennials in particular may wonder why they’ll need less income in retirement. After all, research shows that spending on many items goes up in retirement, especially on health care and discretionary income like trips, vacations, entertainment, hobbies, and charities. Health care costs can expand during retirement via insurance premiums, medications, doctor visits, hospital stays, medical supplies, and nursing home or rehabilitation care.


In Retirement, Spending Is Often 10% Less

Still, with all those items generally increasing, Millennials and other future retirees can expect their overall income needs to be less in retirement. During retirement, people’s tax bracket is often lower than it was when they were working. Many retirees have paid off what’s often a household’s largest monthly expense–the mortgage. In retirement, people spend less on work-related items like transportation and clothes. So the Dimensional Fund Advisors study showed that a typical household with a $50,000 income reduced spending by 10% or more in retirement. Marlena says that figure is consistent with another survey Dimensional Fund Advisors and the Boston Research Group conducted.


Marlena’s Report Ends with a Shocker

For me at least, Marlena ends her report with a showstopper. I don’t believe many people would have anticipated the last sentence in her report:

“…it’s important to move the paradigm from savings to consumption planning.”

In other words, Millennials and others should not just save a certain percentage or build a certain size nest egg for retirement. Instead, the smartest retirement savers will plan how much income they will need to consume in retirement and save to that amount. Saving 12% or 4% or 20% for retirement may or may not be enough, depending on the amount of funds you plan to spend (consume) during retirement.


Save and Invest Scientifically

Marlena’s “The Retirement Income Equation” fed perfectly into a second Dimensional report that crossed my desk. It has this interesting title: “Putting Financial Science to Work.” This second report builds the case for investing scientifically. In graph form, the report shows how investment markets have historically worked to build wealth. This is a factor I fear may be missing for some Millennials.


Missing the Annual Growth Rate of 11.4%

Millennials were in their formative years when we all went through the financial and economic horrors of the Great Recession (2007-2009). That disastrous economic event seems to have soured Millennials on the stock market. I’ve read stories like one about Kevin Goldberg, a 25-year-old who was keeping $40,000 in a savings account that paid him 0.1% interest. Wells Fargo did a survey of 1,500 adults (ages 22-32) and 52% said they were “not very” or “not at all” interested in investing in the stock market. Yet, historically, from 1926 through 2013 markets throughout the world have rewarded investors with compound annual growth rates as high as 11.4%.[1]  Of course, past performance is not predictor of future results. But decades and decades have shown how consistently over time the stock market can grow the average investor’s funds.


Stock Market Abuse

The problem with any stock market is the way it’s used, or rather abused. People who speculate in the stock market usually get burned. People who use a scientific approach in the stock market usually don’t. Fund advisory companies like Dimensional Fund Advisors have continued to find more sound, mathematically and research-based ways to reduce market risk and improve market returns. The top advisory firms can teach Millennials and other investors a philosophy, process, and execution strategy that can be a potent way to grow funds.


No Investment Guarantees

Yes, there’s no 100% guarantee that any investment strategy will succeed. But look at the track records of today’s top investment firms and their principals. Many of them have consistently grown investors’ retirement funds. Smart savers are using markets and investments as part of their retirement planning strategy.

Poor Kevin Goldberg had $40,000 saved but because he kept his funds in a saving account he made about $100 in a year’s time. No one can save for retirement getting that type of return. Do live off 90% or less of your income and save the rest. Do explore investments that will grow your savings with relatively low risk. And keep reading about how to best ensure you have a financially comfortable retirement.



“The Retirement Income Equation: Understanding how to arrive at a target replacement rate” by Marlena I. Lee, PHD, Vice President, Dimensional Fund Advisors, June 2013, Dimensional Fund Advisors

“Putting Financial Science to Work, Dimensional Fund advisors, no author or date listed


[1] The Small Cap Index

Gene Offredi, CFP, RFC, Summit Investor Coach, LLC, 203.453.1017.

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 Gene Offredi, CFP, RFC, Summit Investor Coach, Guilford, CT. Call 203.453.1017 or visit