Social Security is drying up. Will Millennials ever retire?
For many working Americans who had worked and paid Social Security taxes, the standard retirement age was 65 years of age until 1983. It was also when they would begin receiving Social Security benefits. For those born after 1938, the full retirement age increased to 67 years of age following the provisions of the 1983 Social Security Amendments.
While the current average retirement age is 63 years of age, Americans cannot receive their full Social Security benefit amount until they reach their full benefit age. Additionally, diminishing retirement money and challenges in the Social Security program may force millennials into working well into their late 60s and 70s.
In fact, a 2018 Trustees Report from the Center for Retirement Research at Boston College predicts that the Social Security trust fund could run dry by the year 2034 — well before millennials can expect to retire.
With this in mind, we’re left to wonder: Will any Social Security retirement funds remain by the time millennials are ready to retire?
What Millenials Are Thinking
According to a recent Transamerica Center retirement survey, about 47 percent of millennials fear that they will be unable to provide for their families once they do retire. Additionally, 76 percent of American workers fear that Social Security retirement benefits will disappear by the time they retire.
Most financial experts say that millennials will likely need to rely heavily on their IRA and 401k accounts—in addition to other types of retirement funds—in order to live comfortably during their older years. Unfortunately, an employer-sponsored pension plan will be a rarity amongst millennial workers, as only about 17 percent of companies offered these plans to their employees in 2018.
While most financial planning experts do believe that everyone should be worried about the future of Social Security retirement benefits, others suggest that we shouldn’t give up on Social Security completely. According to these sources, the standard retirement benefit amount would decrease if the trust fund ran dry, but Social Security retirement benefits wouldn’t disappear completely.
How Much Is the Standard Social Security Benefit?
While retirees can currently receive up to $2,861 in Social Security retirement benefits if they retire at the full retirement age, the average monthly benefit is a little more than half of this amount, at $1,461. Most Americans need money from a 401K, an individual retirement account or a 457 plan in order to retire comfortably.
Moreover, recent reports tell us that most Americans are not saving enough money to allow them to fully retire by 65 years of age, the current full retirement age. In order to fully retire by 65, most Americans would need to contribute 10 to 17 percent of their income to their retirement account, and they would need to begin as early as their 25th birthday.
If retirement planning doesn’t begin until after reaching 35 years of age, however, American workers would need to contribute at least 15 to 20 percent of their income to retirement.
According to financial experts at CNBC, about two-thirds of millennials have no retirement money saved for their future. Of the millennials who do have money saved, they hold a median account balance of just $19,100 and an average balance of $67,891. To retire comfortably, most Americans believe that they need about $1.7 million saved in standard retirement funds, according to a 2019 study conducted by the Charles Schwab Corporation.
However, a 2017 TransAmerica Center retirement survey says that most Baby Boomers and Generation Xers feel that they need about $500,000 to retire. Millennials, on the other hand, believe that just $400,000 will be enough.
Only about 30 percent of millennial respondents felt that they would need more than $1 million in order to retire, compared to about 40 percent of Baby Boomers and Generation Xers.
Since the ideal amount will vary by situation, using a retirement calculator can help millennials budget and plan adequately for retirement.
Retirement Planning Tips from the Experts
While financial planning isn’t the most enjoyable activity for many young Americans, financial experts at CNBC encourage young workers to participate in their company’s 401K employer matching program, if possible.
If employees cannot contribute enough money from their paychecks in order to receive their company match, financial experts recommend contributing as much as possible—whether it be one, two or three percent of their earnings. Several times throughout the year, millennials can make small adjustments to their retirement contributions to help them save more over time.
IRA and 401K Accounts
Those without a 401k plan can contribute to a Roth or traditional IRA, also known as individual retirement accounts. According to financial experts, contributing to a Roth IRA may be the best solution for millennials whose incomes are likely to increase over time.
With this type of retirement account, contributions and earnings grow tax-free, even as tax rates increase and changes in income move participants into a higher tax bracket.
Additionally, participants can also use this type of retirement account as an emergency savings fund without incurring penalty fees. When participants borrow from IRA accounts that are not pre-taxed, such as the case with traditional individual retirement accounts, they typically need to pay tax and penalty fees. However, financial experts warn against borrowing money from their individual retirement accounts unless absolutely necessary.
Millennial Investors and Entrepreneurs
A self-directed IRA is another type of individual retirement account that can help millennials —mainly entrepreneurs and investors— to save for retirement while supporting vital social causes. According to financial experts at CBS News, this type of tax-free retirement account is best used by participants between 30 and 50 years of age—such as older millennials who were born prior to 1988.
Moreover, Forbes says that approximately 77 percent of affluent millennials strive to make a difference in the world through impact investing. This nontraditional retirement account is especially beneficial to young social investors who wish to invest in real estate, peer-to-peer lending and startups that focus on societal issues, such as poverty and income equality.
Working with a Certified Financial Planner
While the ideal retirement age varies, a recent study conducted by asset management firm T. Rowe Price found that approximately 43 percent of millennials plan to retire before turning 65 years of age. A Bankrate study found that most Americans between 18 and 37 years of age see 61 as the ideal retirement age.
However, financial experts at NerdWallet say that the class of 2018 graduates can expect to retire at about 72 years of age.
To ensure that they have enough retirement money saved by the time they wish to leave the workforce, many experts agree that more millennials should take the time to meet with a financial advisor or planner. Certified financial planners can help millennials to better manage their student debt, identify goals for the future and develop a customized plan for retirement.
If millennials cannot afford the cost of hiring a financial planner, however, using an online retirement calculator can also help them to plan for their older years. This is especially important as the Social Security trust fund faces challenges and the future of retirement benefits remains uncertain.