How Much Do Millennials Need To Save for Retirement?

If your plan is to live a more frugal lifestyle in retirement, your final goal might be eight times your salary saved by the age of 67. Conversely, if you plan to spend your retirement years traveling and living a higher lifestyle than during your working years, you savings goal by age 67 might bump up the factor to 12.

In practical terms, if you are a 26-year-old millennial, you have roughly four years to have the equivalent one year’s salary in your retirement account, which can include any employer contributions you get. If, however, you are a 40-year-old millennial, your retirement savings account should already contain the equivalent of three times your annual salary. If it doesn’t, you may have some catching up to do.

There are other factors that affect how much millennials can put away and what they end up with during retirement. The following three factors could necessitate saving even more than the above estimates, depending on your individual circumstances.

1. Access to Retirement Plans

According to a 2021 Transamerica study, about 21% of millennial workers have no access to an employer-sponsored retirement plan. This can have a big impact on how much you can save in a tax-advantaged account. The less you invest in a company retirement account, such as a 401(k) plan, the more you will have to save overall.

With a 401(k), for example, individuals can contribute up to $20,500 for 2022 and $22,500 for 2023 as a tax-deferred benefit. If they do not have access to a 401(k) plan and need to use an individual retirement account (IRA), they are capped at saving $6,000 a year in a tax-deferred account for 2022 ($6,500 for 2023).

This means that more will have to go to a taxable savings account, thus decreasing the account’s compounding effect, as you have to pay taxes on any interest income or capital gains. In addition, you miss out on the assumed employer match in the above calculations, so you will have to save that percentage on your own as well.

2. Asset Allocation

Having the right allocation in stocks and bonds can make a big difference in how much your portfolio will return over the years. If your asset allocation is too low on stocks, you will not reach your goals. Some advisors suggest that millennials, especially those at the younger end of the spectrum, should allocate as much as 90% to 100% of their portfolio in stocks.

You simply cannot accumulate the money you need to retire without more exposure to equities. Inflation alone will destroy your dollars’ purchasing power if your investments lack appreciation potential. If moving to add more stocks to your portfolio is just too stressful, you will have to find a way to drastically increase your savings.

3. Job Uncertainty

While computers and the web have made things in general really easy, they do come with some drawbacks. The chances of your job being replaced by automation during your lifetime have increased. Some of the change arrives courtesy of COVID-19. According to a recent McKinsey & Co report, “The pandemic accelerated existing trends in remote work, e-commerce, and automation, with up to 25 percent more workers than previously estimated potentially needing to switch occupations.”

Additionally, because of widespread internet access, there is increased competition from foreign workers who can do your job remotely—and likely for a lot less than what you get paid, which lessens the need for full-time staff.

With these two factors in place, the chances of being out of work increase as corporations look to cut costs. When you are unemployed, you lose time and money to save in a retirement account and get an employer match. You also risk needing to withdraw funds from your retirement savings to keep yourself afloat. That’s another reason why you need an emergency fund.

The Bottom Line

There are plenty of reasons why millennials are stressing about saving for retirement. The best way to deal with all of them is to save as much as you can. A good goal is to save at least 15% of your gross income to ensure that you get to live the life you want after you bid the workplace adieu.