Millennials Will Not Reach their Retirement Goals

Millennials will not reach their retirement goals with poor investment strategies that are too conservative, according to the latest survey by Schroders.

The 2023 US Retirement Survey shows that a comfortable retirement may be hard to achieve for all ages but even more difficult for millennials.

Employees aged between 25 and 44 have allocated over one third of their retirement investment accounts to cash holdings. Only 31% has been allocated to equities. This investment strategy will almost guarantee millennials will not have enough savings when they reach retirement age.

The millennials surveyed, indicated that they would need to make $1.3 million in retirement savings to comfortably retire. However, only 29% expect to get over the $1 million balance. Most, around 49%, say they expect to save less than $500,000. And 27% claim they will accumulate less than $250,000 in their retirement accounts.

Millennials Investment Allocation

In addition to the cash allocation at 33%, millennial workers responded the remainder of their assets were allocated like this, according to the survey:

• 31% in equities
• 16% in fixed income
• 14% in target-date funds, which often include stocks
• 6% in other, unspecified assets

Fear of losing money has driven people to increase cash holdings and risk missing out on higher long-term investment returns.

Millennials are holding cash because they have witnessed the S&P 500 index plunge 19.4% in 2022. Many millennials started investing in their retirement plans just before the GFC crashed the stock markets around the world causing a recession. Recently, in 2020 the COVID pandemic crashed the market, although the recovery was fairly rapid. This has really spooked younger employees into taking an overly conservative investment strategy for their retirement. Around 55% of survey participants indicated that the 2022 stock market result greatly increased their anxiety towards investing in equities. Over 49% of survey participants indicated that they have lost sleep worrying about their financial plan.

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Millennials Need Investment Assistance from Employers

Millennials need more assistance from employers to help plan for their retirement savings goals.

Generally, the younger the employee, the more aggressive the investment strategy towards equities. Young millennials should be investing a high proportion of their retirement accounts to equities for superior long-term returns. Short-term results are of little consequence to young people as retirement is far away.

A higher allocation to equities, such as 60% to 80%, would produce much better long-term results for millennials. Equities outperform cash and inflation over the longer-term so young people should not have to worry about short-term market volatility.

Investing in cash is reserved for older investors who are much closer to retirement age and don’t want to be impacted by a sudden market downturn.

The survey indicated that 56% of working millennials with retirement plans said they wished their employers would give them more direction about how to invest in their retirement plans.

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Conclusion

Investing is a long-term strategy that will outpace inflation and generate an account balance required to fund a reasonable standard of living in retirement.

Millennials will not reach their retirement goals without guidance and education to develop an investment allocation that will meet their retirement objectives without worrying about market fluctuations. Young workers have a long time to invest in equities and accumulate their savings.

It’s only when employees are moving into their 50s should they allocate risk away from equities and hold a higher proportion of cash and fixed income investments.

Source:

Schroders_2023_US_Retirement_Survey_Readiness_Rpt_FINAL.pdf