Retirement is a topic that many millennials don't really enjoy thinking about. From the moment they graduate, they are faced with several strifes common to young adulthood, from student debt and a ruthless job market to irregular incomes and sometimes even prolonged unemployment. These obstacles make saving for retirement all the more difficult to plan for.
But millennials, who are now in their 20s and 30s, are at the critical age where saving should be a priority. A recent assessment by JP Morgan entitled The Millennials: Now Streaming the Millenial Journey From Saving to Retirement attempted to determine just how much the average millennial would need to save in order to retire comfortably. Their analysis took into consideration the possible impact of typical life events, the economy and government on retirement planning.
The assessment found that if millennials started saving at the age of 25, they would need to save the following amounts in order to meet retirement income targets at 67 years old:
Median-income millennials woud need to set aside 4% to 9% of pre-tax income each year.
Affluent millennials would need to set aside 9% to 14% of pre-tax income each year.
High net worth millennials would need to set aside 14% to 18% of pre-tax income each year.
Additional to pre-tax savings, millennials will need to save 2% after-tax and have an employer match of 50%, capped at 3%.
The higher percentages seen for affluent and high net worth millennials are due to the fact that they 1) put less of their total income into social security each year and 2) are faced with higher taxes than median-income millennials. According to Mark Hebner of Index Fund Advisors, Inc., the combination of those two effects means that millennials of such groupings "must rely more on their own savings to be able to fun their standard of living in retirement."
The aforementioned figures are by no means set in stone and are simply general guidelines. In reality, several factors will affect the amounts one can actually save, including accessibility to retirement plans, allocation of assets and employment uncertainty.
Employees who do not have access to retirement plans miss out on the benefits of employer matching and tax-protected accounts, and will have to compensate for those on their own.
Allocating to stocks is also an important consideration, as cash savings do not have the accumulating power necessary for retirement and it will be very difficult to withstand the forces of inflation.