Millennials vs. Boomers: Which Generation Is Better Prepared for Retirement?
Many boomers are currently retired or on the cusp of retirement, so it wouldn’t be a far-off guess to assume that boomers are better prepared financially for this phase of life. However, a recent Vanguard study found that millennials are actually better prepared for retirement than baby boomers.
The study found that millennials who are median-income earners will be able to generate sustainable retirement income equal to 58% of their pre-retirement earnings, while median-income boomers will be able to generate sustainable retirement income equal to just 50% of their pre-retirement earnings. This gap is even greater for higher-income earners. The study also found that millennials in the 70th-percentile of income earners are on track to reach a sustainable replacement rate of 66%, while baby boomers at the same income level are on track to reach a sustainable replacement rate of 51%.
Boomers May Have Been Relying on Pensions
For the generations before the baby boomer generation, having access to a pension through work was very common. This meant that many boomers grew up not worrying about how they would pay for retirement, as they assumed they would have access to pensions as well.
“For decades, Americans had not been conditioned to worry about retirement savings,” said Robert R. Johnson, Ph.D., CFA, professor of finance at the Heider College of Business at Creighton University. “Over the past few decades, there has been a shift from defined benefit to defined contribution pension plans. In the defined benefit world, one didn’t need to be concerned with saving for retirement. The baby boomers retiring today began their careers in the defined benefit world. They didn’t witness their parents saving for retirement and weren’t conditioned to do so themselves.”
Younger People Are More Aware of the Need for Retirement Savings
The millennial generation has been taught to think about retirement from a young age — something that was not necessarily the case for boomers.
“There has been a great deal of press about the lack of retirement savings and that has put a spotlight on the issue,” Johnson said. “Younger people are inundated with media stories about the retirement income crisis. And, they see people in the labor market working well past retirement age — that is, people working not because they choose to work, but because they need to work.”
Millennials are also more skeptical about the viability of Social Security to provide retirement income by the time they get to that phase of life.
“Stories about how Social Security will go away in the future are prominent in the media,” Johnson said. “While there is very little likelihood that Social Security will disappear in the future, reduced payments or means testing certainly could be a consideration for future Social Security beneficiaries.”
Millennials Are More Likely To Have Been Auto-Enrolled in 401(k) Plans
By the time millennials entered the workforce, it was pretty common to be automatically enrolled in an employer-sponsored retirement plan. This was not the case for boomers.
“Millennials have certainly benefited and will continue to receive help from automatic enrollment in employer-sponsored retirement plans, like 401(k) [plans], when they enter the workforce,” said Jim Penna, manager of retirement services at VectorVest. “This automatic participation encourages early saving for retirement, setting up a positive path for long-term financial security.”
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