My son Jack will have a very different road to retirement than I did when I joined the workforce. Jack, who is 23, and his millennial generation start their careers knowing they have to save for retirement. Fortunately, many have employers who help them get started by automatically enrolling them into their 401(k)’s default investment and even add a company match to their savings.
People my age and older—the baby boom generation—had to navigate the change from a traditional pension world to the 401(k) world. Fortunately, those of us who started early had the advantage of an era of strong market returns to boost our savings. But, there is one thing both generations, mine and Jack’s, will face together: an extended period of low market returns.
Horizon Actuarial put together a consensus forecast based on a survey of 35 financial industry firms (including BlackRock). If the consensus proves correct—always a big “if” —the average annual stock market returns may be more than 3% lower than recent decades. See the accompanying chart for more details. The predictions for bonds are even more alarming, with the consensus forecasts suggesting nearly flat inflation-adjusted returns for the foreseeable future.
Low returns and your retirement
While we’re all in it together, low returns will affect each generation differently. For my generation, if you haven’t been saving, low returns will make it even harder to catch up for lost time. For Jack’s generation, they won’t get the same benefit of compounding returns as I did. They will probably need to save longer, and save more, simply to be retirement ready.
No matter where we are on the road to retirement, we have three tools at our disposal: contributions, time and investment returns. The question is, what can we do to improve our retirement equation? I’ll share the advice I gave Jack, advice that also applies when I think about saving for my own retirement:
First off, not meeting the company match means you’re leaving money on the table. But meeting the match isn’t likely going to be enough. It’s time to kick it up a notch and take advantage of your plan’s benefits—increase your savings rate and be sure to opt in to auto-escalation.
Use time wisely
Jack’s millennial generation may think they have a long time to save for retirement, but a late start wastes one of their most important assets: time. Time helps investments do their work by compounding returns and potentially subsidizing savings balances. And they’re going to need it. Jack’s generation is going to live longer and they’re going to need more savings to pay for a longer retirement.
Know what you’re on track for
Especially in times of market uncertainty, it’s critical to understand how your lump sum in savings today will translate into income streams tomorrow. Use an income calculator to measure the gap between what you are on track to save and what you may need in retirement. And, the sooner the better—the earlier you know your gap, the more time you have to make changes to get back on track.
It won’t be just one of the actions above that will be enough to make up the retirement savings shortfall—in saving for the long term, it’s impossible to predict how much more you can save, how much longer you’ll be able to work, and what returns the market has in store. Taking action now to improve all three parts of the retirement equation is what will ensure that you’ll be able to achieve the retirement outcome that you’re aiming for.