To gather insight into how younger generations are saving for retirement, we conducted interviews with millennials who work at Janus Henderson and captured our findings in a series of podcasts and videos. In our first “Marching to a Million” podcast, Retirement Director Ben Rizzuto spoke with millennial colleagues about their personal financial backgrounds, current saving and investing habits, and use of automation within their retirement plans.
Marching to a Million: Meet Our Millennials - Ben Rizzuto
- Millennials are the best educated generation in U.S. history but are often thought to be less savvy than previous generations when it comes to managing their finances.
- While some statistics indicate millennials are falling short in their retirement preparation, other research shows their saving rates are equal to those of Generation X.
- Our interviews with millennial employees at Janus Henderson provide insight into how this generation views investing, financial advice and retirement planning, with Retirement Director Ben Rizzuto offering guidance for investors who are just starting their “March to a Million.”
Ben Rizzuto: I’m Ben Rizzuto, and this is a Janus Henderson Knowledge. Shared podcast ...
Voiceover: The millennial generation has been stereotyped at times by some people as maybe lazy or perhaps entitled...
Rizzuto: Millennials! Ah yes, everyone’s favorite generation to discuss, study and complain about.
Voiceover: Millennials have ruined everything!
Rizzuto: That mercurial group born between 1981 and 1996, which, if you do a quick search online, is thought to be entitled, selfish, unable to socialize since they’re constantly taking selfies in their quest to become famous on Instagram, don’t like to work hard and don’t know how to handle money.
And that was from just one article!
You’re about to meet five millennials. You’ll hear their views on savings, retirement plans and how they expect to retire, so hopefully you can help guide younger participants that you work with. It’s a series we’re calling “March to a Million.” Insight into how millennials are, or are not, saving for retirement.
As of 2018, those folks between 23 and 38 years old number 83.2 million. They are the largest, best educated and most diverse generation in U.S. history. However, as I just mentioned, they are thought to be less savvy than previous generations when it comes to handling money, saving for retirement, budgeting, and establishing and maintaining a financial plan.
Many feel this group is already falling short, since two-thirds of working millennials have nothing saved for retirement. Along with that, even though 66% of millennials work for an employer that offers a retirement plan, only 34% participate in their employer’s plan.
From this perspective, this may be a crisis in the making, but another perspective shows that millennials are saving at rates equal to Generation X.
So we can focus on the negative stats or we can learn from those in that second group... those who are actively engaged in planning for the future.
Many times we say that a nest egg of $1 million is what people should shoot for as their “number.” For a 25-year-old who is just starting their career, saving a million dollars for a retirement may seem like a huge and very nebulous problem to solve, but if you break up that big future problem into small chunks, it may actually be quite achievable. For example, if a 25-year-old were to save just $77 per week over 40 years assuming a 6% rate of return, they would in fact be able to achieve that $1 million goal.
The issue many face is that they get off track in the beginning and then all the financial pieces of the puzzle become harder and harder to put together … and that big goal becomes a bigger and bigger problem that is only getting closer and closer.
With that said, I invited millennial colleagues of mine to sit down and discuss how they are working to ensure they have a significant nest egg awaiting them when they retire. Caitlin, Hadley, Jerry, Killian and Nadia. These are real people who are just starting their careers. Young adults who are having to navigate new issues, new places and new phases in their lives, and in many cases, they are making it work. They have started their March to a Million.
Rizzuto: I started every one of my interviews the same way, with the same stats I mentioned in the beginning: the fact that two-thirds of working millennials have nothing saved for retirement and that even though 66% of millennials work for an employer that offers a retirement plan, only 34% participate in their employer’s plan. I wanted to see what the reaction would be. I wanted to see if all the negative trends or lack of engagement that has hindered millennials’ trajectory toward this success would hit home for these five.
What I think was most telling about the reactions I got and should make all of us hopeful was the shock that our group showed with regard to these trends.
Here is Nadia’s reaction.
Nadia: I mean, it kind of makes me question what people are doing first off. I don’t know why people wouldn’t really want to be thinking about their future, and, you know, when they can retire, if they can retire. I think the statistic is kind of interesting just because, you know, I have so many friends that were so open about talking our 401(k)s, how much we’re investing, how much our company match is, and so forth.
Rizzuto: And here are Caitlin’s thoughts on investing.
Caitlin: I think that millennials don’t have an understanding of the market or how investing works. They’re very distrustful of it because they don’t understand it. They understand cash, and so they have their savings in, like, just like low-interest savings accounts with their banks, not with, like, stocks and mutual funds and other investments.
Rizzuto: Granted this is a small sample, but it points to the idea that yes, saving for retirement when you’re young can be done, and it is top of mind for many.
Now while there is hope, it doesn’t completely fix the issues that exist. Those issues were summed up by Jerry.
Jerry: I believe it, honestly. Like, it is a different environment than a lot of people are used to, and money is being a little bit spread thin, if you ask me. So it seems like yeah, it would be easy to put retirement on the back burner for most people.
Rizzuto: The reason that things are being put on the so-called back burner? Again, Jerry gives us an idea of all the financial directions millennials are being pulled in.
Jerry: My environment today... so rent is going through the roof, the housing market is a lot harder to get in to than it used to be. Obviously, money is thrown at a bunch of different things, car payment, student loan is a big one, and subscriptions to all these other things to take your mind off your student loans. So it all comes full circle.
Rizzuto: I think we can all agree with the idea that life is not getting any less expensive, but let’s put some numbers to it.
First Jerry mentioned rent. Where I live in Denver, Colorado, the average-size apartment is 841 square feet. The average monthly rent for that apartment is $1,600. On the low end, it’s $1,200, and if you want to live in the cool parts of the city, it will run you up to $2,300.
Next, you’ll need a car. The average car payment for a new car in the U.S. is $530 per month. For a used car, it’s $381, and if you happen to lease, well, that’s going to be $430.
Then Jerry mentioned all of the subscription services one needs these days to keep up with all of the new TV shows that are coming out. A Netflix subscription will be $9, $13 or $16 depending on your package. But of course, Netflix doesn’t have all the TV shows or live sports you may want to watch, so you’ll need to add on to that. Luckily, Disney+ will be available in November, and by bundling Disney+ with ESPN+ and Hulu, you’ll be able to get your sports fix plus have access to all sorts of other movies and TV shows for the very low price of $13 per month.
From there, we can add on the internet services needed to stream all those TV shows, utilities, groceries, etc. etc. etc.
Along with all those expenses, we can add to that the feeling we’ve all had at one time or another during our youth: the idea of being invincible. Here’s Jerry again...
Jerry: I think age has definitely something to do with it. I mean, we are young, we are invincible, right? We don’t have to worry about retirement. But it is definitely something I think people need to consider, especially because if you don’t get it squared away, it will come back to bite you.
Rizzuto: The point is, it is very easy for someone to get off track early on in life, and putting off saving for five or 10 years, that could lead to that million-dollar nest egg being cut in half.
Rizzuto: Now one of the ways to stay on the right track is to consistently follow solid saving habits. With that said, we know how important one’s family is in influencing these sorts of habits and more generally providing a solid foundation when it comes to financial education. In fact, 44% of Americans learned the most about personal finance from their parents. Here’s Nadia.
Nadia: Oh yeah, it was a big thing. So, my parents are divorced, so I think even more so from that, I think saving was a bigger thing for me; my mom had to provide for the family, and then my dad was also providing. And so my mom, if she wanted to take us on a trip or if you wanted something extra for school or something like that, she’d be, like, you need to save for that. And then, you know, my dad, we’d always go to him and be, like, “Hey, can we have this?” and he’d be, like, “No, you need to save your own money.” So I think in terms of saving, it’s always kind of been something that I have always had ingrained in my brain.
Rizzuto: It didn’t matter if parents were married, divorced, aunts, uncles or grandparents. Everyone had a very specific story of how their family influenced and continues to influence their financial lives. For Kilian, a clever – and you’ll notice, a very familiar strategy – taught him how to save from a very young age:
Kilian: I remember one of the ways my parents taught me this was just with a weekly allowance when we were pretty young. I have a younger sister, both of us, and one of the things I do is give you a weekly allowance, and then if you want, you can put it in the savings piggy bank, and every dollar we’d put in there they would match. And then once it got to a certain level, once we were a little bit older, taking us into a bank, starting a small savings account.
Rizzuto: I thought that right there was one of the best takeaways I got from all my conversations. So often we talk about how financial literacy is lacking in this country. Twenty-four billion dollars is left on the table just by participants who don’t defer enough into their 401(k)s to receive a company match. Kilian’s mom first made sure that he and his sister had a place to save their money and then provided a dollar-for-dollar company match for their good financial behavior. Not only that, but this system helped instill the idea that saving small amounts consistently can turn into larger and larger amounts over time.
Rizzuto: Many of the financial ideas and principles family members discussed during childhood are still in use today. The financial aphorisms and adages that America was founded upon were repeated over and over again. Things like:
- Always have something to fall back on.
- Have at least two months of money in your emergency fund.
- Don’t spend what you don’t have.
- Don’t dip into your savings.
Ideas like this can be repeated by millennials, not to mention even younger children, but as we know, there’s saying and there’s doing.
So are our millennials savings? Well, wait until you hear how much Nadia is putting away!
Nadia: Yes, so I have a personal savings account, which I usually typically allocate 15% to20% of my paycheck, so. And then other than that, I have this app where it basically just withdraws your loose change and then invests it. And then I have another app, which basically each day will withdraw a certain amount of money from your checking account so that you can add it to your savings account. So those are the couple things that I probably do to save and invest other than my 401(k).
Rizzuto: Now, not only is she saving between 15% to 20% of every paycheck outside her 401(k), but she’s deferring 10% of her salary to her 401(k)!
Caitlin also has a pretty aggressive savings strategy.
Caitlin: I have a savings account with my bank that has just enough to cover, like, three months’ expenses just in case I ever find myself unemployed. I have a Roth IRA in a brokerage account that I contribute $50 a month to, sometimes more if I can. And I also have just, like, a no-retirement brokerage account, also $50 a month, sometimes more if I can.
Rizzuto: Again, like Nadia, Caitlin is deferring 10% toward her 401(k). Oh, and what’s also interesting is that she is deferring into the Roth 401(k) portion of the company’s retirement plan.
Stop and think about that. Recent surveys have estimated that over 70% of retirement plans offer a Roth option, but only 20% of all participants contribute to those options. Here we have a young woman in her 20s who has embraced Roth and does so at the significant rate of 10%.
This highlights something I’ve been talking about a lot of late. When it comes to Roth or other features that are being offered within plans but not being taken advantage of, we need to look at ourselves and ask why more people aren’t taking advantage. Is it a matter of educating them as to the possible benefits, specifically tax benefits in the case of Roth, or is it as simple as reminding them that it is an option. I’ve found many of the features we view as common knowledge aren’t as widely known as we think.
Now of course, not everything is rainbows and unicorns. These are best-case scenarios, but one thing I found, specifically with others who might not be saving as much or doing so in other accounts, was how important a company’s match can be.
Rizzuto: Based on Plan Sponsor magazine’s 2018 DC Plan Benchmarking Survey, 77% of plans offer a match, and the most common contribution pays between 3% and 5%.
During these conversations, time and time again, I witnessed how the company match serves as the guidepost for participants’ deferrals.
Kilian: I did that completely on the matching. So we match 5%. So I just put 5% of my paycheck in.
Hadley: What seemed like the most sense to me at the time was to at least do the amount that they would match. So that’s what I did.
Caitlin: Well, our company matches 5%, so I’ve always been at least 5%. Because who am I to turn away free money?
Rizzuto: So, there we heard from Kilian, Hadley and Caitlin. And, but of course, the question that probably comes to mind right now is what if that match formula was something else? Well, both Nadia and Kilian provided us with their thoughts on how a lower match percentage or no match being offered might affect their financial behavior.
Nadia: I think if they offered 2% or 3%, that would be kind of not motivating, you know, just because I do have friends who work at other companies, and their companies match them anywhere from 5% to 6%. So I think it’s pretty standard to be at 5%, and, you know, 6% is probably a pretty good match as well, so.
Kilian: I think I probably wouldn’t have put in as much, especially being a first-time or right-out-of-college job, and obviously having … a lot of my budget right now is dictated by necessities. So it’s always nice to have a little more of a cash cushion in my life, so I think I would have invested less for a lower deferral rate.
Rizzuto: This really crystalized the importance of the match and what a key decision it is for plan sponsors. Many times, plan sponsors will set the default deferral rate and/or the match percentage low because they fear participants will feel too much financial hardship if this is set too high, and they will then in turn opt out.
First, I think the ideas we just heard really show us that we need to talk about and market our plan’s match percentage with participants on Day 1 of employment and maybe even during the recruitment process. From there, we need to make sure we are reminding every participant about it consistently to make sure they are deferring enough to receive it.
Second, regarding the hesitancy you might feel about defaulting people at a rate that is “too high.” I’ll point to research from Shlomo Benartzi that tracked opt-out rates for participants who were randomly assigned contribution rates between 6% all the way up to 11%. The study found that deferral rates between 7% and 10% did not result in lower enrollment when compared to a 6% control rate, and the highest rate suggested – 11%, remember – resulted in only a slight drop in enrollment.
So I think using a higher default deferral rate and a higher match percentage make sense not only based on the research but especially for younger people who are entering the workforce. Now, they may not have the highest salaries, and they may be pulled in many financial directions as we touched on earlier, but as many of us know, things only get more financially complicated as we get older. In fact, we heard that idea come up from Nadia, who mentioned how her father provided guidance:
Nadia: I talked to my dad, and he was basically just, like, elect a higher percentage now, because in the future you probably won’t be able to do that because, you know, you might have kids. You might have a house to pay for … I’m young, I don’t have a lot to pay for, and if I were to have the money instead, I’d probably spend it on something else or not save it properly. So I think that’s the best way to go about saving.
Rizzuto: The path that a well-designed match program and default deferral rate can create on some level speaks to how important automation can be for a plan and its participants. Most of the stats show us that plans that are successful use automation. One hundred percent of Plan Sponsor magazine’s Best in Class Plans use both auto-enrollment and auto- escalation. Not only is this important inside a plan, but it’s also important outside the plan. Of those I spoke to, the ones that are saving the most are doing so by automating their savings. Caitlin described how she treats savings almost like a phone bill.
Caitlin: I mean, it is set up on auto pay. Like, I automatically put money into those accounts every month. So I can send out a bill, like putting money into my investment account. So I consider that a bill that has to be paid.
Rizzuto: Now, while we did see several of our millennials successfully using automatic deposit to continually add to their savings, I was surprised to hear how most of them were unaware of not using auto-escalation within their 401(k) accounts. We just saw how the best plans are offering auto-escalation, but it seems like having that extra 1% per year taken out of their paychecks made this group uncomfortable. In many cases, I pressed them on the issue, saying, “You save 10%. What’s so different or uncomfortable about 11%?” No one had a good explanation as to why. So I think this highlights one of those behavioral tendencies many may have that lead to less-than-optimal financial decisions and, more importantly for all of us, an area where education may be needed.
Overall, these five young millennials are at the beginning of a financial journey. A financial journey that has many different twists and turns but, as I mentioned earlier, the hope is that they have started their March to a Million. We will be documenting this march through a series of podcasts and resources. So, until next time, I’m Ben Rizzuto.