New grads might not retire until 75, new study finds
How鈥檚 75 sound for a retirement age? Too far away? That could be the reality for today鈥檚 college graduates, according to聽.
The study looked at how rising student loan debt and higher rents are squeezing 2015 graduates. Those costs have risen 19% and 11%, respectively, since NerdWallet last looked at millennials and retirement.
The previous聽study, published in 2013, projected a retirement age of 73 for that year鈥檚 grads. Today鈥檚 higher expenses could tack two years onto the careers of millennials, forcing them to work 13 years longer than today鈥檚 retirees, who have an average retirement age of 62.
The true cost of debt
High student loan and rent payments limit millennials鈥� ability to save early, says Kyle Ramsay, the investing manager at NerdWallet. That means they miss key opportunities for compound interest to boost their retirement funds.
Compound interest helps money grow over time: A 23-year-old who invests $10,000 at a 6% return today could end up with twice that amount in 10 years 鈥� and 20 times that by the time he鈥檚 75. That鈥檚 with no further savings contributions.
鈥淎 lot of people don鈥檛 understand that at this age, your biggest asset is time,鈥� says聽, a certified financial planner with Talis Advisors in Plano, Texas. 鈥淭he longer you have to take advantage of compounding interest, the more money you鈥檙e going to have. Waiting a year or two now to start putting money away means a lot less money in 35 or 40 years.鈥�
The burden of聽, which now averages more than $35,000 at graduation, could cost graduates close to $700,000 in lost retirement savings because of the missed compounding interest on that money they could have otherwise invested.
Millennials wary of investing
Millennials who do find money to save shy away from investing it. Research by State Street, a financial services holding company, found that millennials have 40% of their investable assets in cash, such as checking and savings accounts, and term deposits such as CDs.
In the two years leading up to the May 2014 State Street report, millennials increased their cash allocations at a rate similar to baby boomers. But unlike millennials, baby boomers were liquidating some assets for retirement income.
鈥淢illennials read about how high the stock market is and that we鈥檙e overdue for a correction or worse, and 鈥� even after the recent correction 鈥� still see risk in the markets,鈥� says聽, president of Sheehan Life Planning in Fresno, California.
The markets always carry risk, but historically, long-term investors who ride out stock market waves benefit from investment returns. And millennials have a lot of time on their side.
鈥淢y advice to millennials I speak with is to realize that throughout the history of the investment markets, there have always been traumas,鈥� Sheehan says. 鈥淔or those who invest wisely 鈥� allowing the market time to do its work by compounding 鈥� there isn鈥檛 a better way to invest for their future than the stock market.鈥�
Most experts recommend that an investor in his 20s allocate 80% to 90% of his retirement portfolio to stocks, typically via low-cost聽.
Small changes can add years to retirement
There is hope. The study also dug into how millennials can take steps now to move retirement years closer. could move to target a more reasonable聽听补驳别.
Recent grads who are able to live at home for a few years and spend that time saving more 聽could lower their expected retirement age by five years, Ramsay says.
Even if that鈥檚 not an option, making smart savings decisions in general can make a big impact: Millennials should max out employer 401(k) contributions before saving in a, and make sure their聽聽is appropriate for their age. (Here are NerdWallet鈥檚 picks for best聽听补苍诲听听滨搁础蝉.)
Those who increase their savings rate will be rewarded with a longer retirement. NerdWallet鈥檚 calculations for a 23-year-old new grad earning the median starting salary of $45,478 found that saving 10% annually could bring that retirement age down to 70. Someone who can put away 15% would be able to retire at 65.
Those increases in retirement contributions can be made gradually, bumping up a few percent a year. Lean years 鈥� such as those spent paying off student loans 鈥� can be balanced out by saving more during years that are flush.
鈥淢ake savings contributions as a percentage of income, instead of a dollar amount, because that makes it easier psychologically,鈥� Hart says. 鈥淎s you get raises, your contributions will grow with them.鈥�
Finally, identify cash to save by creating a budget and tracking your spending, Hart adds. 鈥淓ven if you just do it for a month 鈥� you can do anything for a month 鈥� you can sit down at the end and look at where your money is going, and that鈥檚 where you鈥檒l find more disposable income to save.鈥�
