Social Security, Retirement Savings, and Millennials

There is an estimated 10,000 new baby boomers qualifying for Social Security every day.  And, we know the average life span for individuals in this country continues to expand as the population continues to get older. There is also a ravenous appetite for unsustainable national spending by our politicians, thus creating the perfect storm.  It’s no wonder that some people, mainly millennials, are disillusioned about the prospects of ever getting back what they put into Social Security system.  A “millennial” is a term used to generally used to describe a person reaching adulthood sometime around the new century.

Some other things we know is that saving for retirement is a daunting task. Saving for retirement is especially difficult for young people to do because their salaries are typically lower in their 20’s and 30’s than during their peak earning years.  With technology as prevalent as it is in our society, we know how easy it is to spend money.  Buying stuff now and paying for it later has never been easier for our younger generation.

So how much are millennials willing to save for retirement, especially if they think there will be nothing left in the Social Security tank?

According to the Insured Retirement Institute in a recent study more than half of millennials don’t have a 401(k) and only three in ten are actively planning for retirement.  And, 60% of millennials think Social Security will go bankrupt.  That doesn’t seem like a very good plan, especially if their assumptions about the prospects of Social Security going belly up end up being correct.

Social Security is a major source of income for most of the elderly in this country. In fact, nine out of ten individuals age 65 and older receive Social Security benefits. It represents about 39% of the income for the elderly. To put it another way, if you were to extrapolate the expected income you would receive from Social Security over your lifetime, it would probably represent one of your largest retirement assets. Much like many of the millennials, most people do not fully realize the importance of Social Security income as it relates to your overall retirement plan

Let’s take a look at an example of a 65 year old male who begins receiving $2,000/month in benefits. By the time this individual reaches age 90 he would have received $821,640 in Social Security benefits which includes a 2.5% Cost of Living Adjustment (COLA) annually. Not bad. In fact, the $821,640 in income is probably more than the value of his home or 401k plan.

Here are some other interesting facts about Social Security:

53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.

22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income.

So, why aren’t millennials trying to save more?

Two in five millennials are not saving enough in their 401k to get the full employer match according to a T. Rowe Price report last July. That’s leaving free money on the table and ignoring a 100% return on their investment. Currently, millennials are only setting aside 6% of their salary for retirement.

In addition, a recent Pew Research Center report found that 72 percent of Millennials don’t expect Social Security to be their main source of retirement income, and 42 percent don’t think they will get income from the entitlement at all.

Many millennials support more choice in privatizing Social Security rather than putting more of their trust in the government. If that sentiment is true then you would think millennials would be more eager to set aside more of their money in retirements savings or investments. But, that is simply not the case.

To be honest, though, there have been some mitigating circumstances that could help explain why this new generation is saving even less than previous generations. Maybe one contributing factor is that Millennials have one of the worst unemployment rates of any age demographic in the United States. And, for many, hiding in graduate school in their late 20’s has been a convenient way to avoid making money and saving for retirement.

Also, students graduating from college are faced with increasing amounts of debt. In fact, the average college student has about $28,000 of student loan debt at graduation.

Millennials, according to an existing-home sales report released last June by the National Association of Realtors, are not sharing in the American dream of buying a home. They would rather rent than buy. Some experts in the field argue that millennials have too much student loan debt, coupled with a growing fear of another market crash, which skews their interest in buying new homes.

So how much money will millennials need for retirement?

Some people estimate millennials will need almost two million dollars in retirement savings, especially if Social Security is a thing of the past. That estimate seems awfully daunting if in fact the younger generation is delaying putting away any of their retirement savings. Once in retirement, if you were to withdraw 4% a year in income safely from your savings, you would have about $80,000/yr in income. That is assuming you were able to get to the high water mark of two million beforehand.

To summarize, there has to be some fundamental changes if millennials are going to have any money left over for retirement; There has to be some sort of cultural change when it comes to the saving habits of millennials or there needs to be some household changes in how Social Security is funded. And, based on the ability of our elected officials in Congress to make the necessary cuts in spending and enact legislation that safeguards our Social Security program, it is really hard to say which is easier–to change an entire culture of spenders or to put our faith in our country’s politicians. It’s really anyone’s guess.

David Albahary is the founder of Ivy Ridge Asset Management, LLC,