Personal Finance

The typical millennial is staring directly at a $1.5 million "shortfall" in their retirement goals

John Seetoo

Published: November 14, 2024 2:47 pm

Even before the economic upheavals caused by rampant inflation, retirement savings among millennials were lagging at a pace behind boomers when they were the same age. Big data-powered targeted marketing on our smartphones, laptops, and entertainment media viewing is designed to extract more spending from every man, woman, and child, and has been very successful in that goal.

Northwestern Mutual conducts an annual survey on financial concerns, habits, and practices among Americans. The 2024 Planning and Progress Study found that retirement savings among millennials and Gen-Z lagged that of boomers, but millennials, in particular, are looking at a significant shortfall: approximately $1.59 million on average.

The Millennial Retirement Savings Gap

The study showed that millennials have an average retirement savings target of $1.65 million, yet their average accounts only contained $62,600. Given that the oldest millennials turn 43 in 2024, this leaves 22 years left before retirement age, with a few more years left for those in the middle and farther end of the range, which ends with those born in 1996.

Surprisingly, the majority of millennials optimistically believe they will be able to comfortably retire by age 64, vs. age 67 for Gen-X and 72 for boomers. Cognitive dissonance? Or is this naivete due to ignorance?  In either case, millennials are behind Gen-X and boomers in their retirement savings, both in amounts and pace. Gen-Z, admirably, has embraced the F.I.R.E. (Financial Independence Retire Early) principle, and several Gen-Zers have commenced retirement savings at age 22, while millennials started in their late 20’s.

How Millennials Can Bridge the Gap

Given that a majority of millennial study respondents expressed a life expectancy to age 100, retirement savings and long-term health care plans are essential. These resources require cultivation and growth to start immediately, in order to provide sufficient coverage during one’s golden years.

• Catch the F.I.R.E. – The F.I.R.E. principle aggressively calls for savings and maximization of investment growth to build retirement savings as fast as possible. Budgetary scrutiny, fiscal discipline, and drastic cuts in unnecessary spending are all key components of F.I.R.E.
• Saving Incrementally, But Regularly – Automatically setting aside a portion of one’s salary into a 401-K is one way to implement this practice. For those whose employers don’t sponsor a 401-K or who work freelance, an equivalent system can easily be devised. Adding those funds towards growth investments every month will gain the benefits of compounding.
• Side Hustles – Popular with Gen-Z, side hustles, i.e., freelance gig jobs and part-time work, are a good way to both network and create an additional income stream. The other benefit is that by growing the side hustle to the point where it becomes a declarable occupation to the IRS post-retirement, maintaining it will allow IRA withdrawals at a lower tax bracket.

Tax Considerations

The Northwest Mutual study also found that only 30% of Americans, on average, take advantage of tax strategies in handling retirement funds. The following are the 10 most popular ones, all of which could result in keeping tens to perhaps hundreds of thousands for personal use instead of going to Uncle Sam.

1. Strategically withdrawing from traditional and Roth accounts to remain in a lower tax bracket (32%).
2. Combining a mix of traditional and Roth retirement accounts (30%).
3. Making use of strategic charitable donation deductions (24%).
4. Deploying a Health Savings Account (HSA) or other tax-advantaged healthcare account (23%).
5. Using life insurance or annuities for the tax benefits (22%).
6. Converting Roth IRAs prior to taking required minimum distributions or Social Security (19%).
7. Use of qualified charitable distributions from an IRA (17%).
8. Making contributions to other tax-advantaged accounts like a 529 account for a child’s future education(14%).
9. Using the basis paid into the cash value of permanent life insurance to stay in a lower tax bracket (13%).
10. Deployment of a Qualified Longevity Annuity Contract (QLAC) to set aside funds for later in retirement (13%).

This article is intended to be for informational purposes only. A financial professional should be consulted if greater, in-depth financial advice is being sought.