Breaking down Gen Y's $2 million retirement price tag
This just in: $1 million isn't what it used to be. That's the supposed news coming out of a recent survey of investment advisers conducted by Scottrade. More than three-quarters of registered investment advisors (RIAs) surveyed said Gen Y should save at least $2 million for retirement.
"While there are no definitive answers on how much money various generations will need to save for retirement, it is clear that the majority of RIAs feel the $1 million goal is not enough for most families," said Scottrade's Craig Hogan in announcing the survey results.
Really? That's news? Seems to me the real news is the fact that 100 percent of the RIAs didn't think $2 million is a reasonable nest egg target for Gen Y. Inflation's impact over the next 40 years or so makes $2 million a fairly conservative estimate of what today's 20-somethings will need to maintain their purchasing power in retirement.
Enough with the Scare Tactics
It's unfortunate that we're still talking about "The Number" when it comes to retirement planning. Clearly, headlines running big scary numbers serve no useful purpose other than to push most people to tune out.
What makes for a less ominous headline, but far more useful planning advice, is to recast the issue and slap this headline on it:
Hey, Gen Y: Save $100 a week and relax.
Yes, relax. A 25-year-old Gen Yer who manages to start saving $400 a month today will have a nest egg in the vicinity of $2 million by age 70 assuming the account earns an annualized 8 percent. Even more useful would be to point out that if you happen to work for an employer who offers a 401(k) matching contribution, you can have your boss do a lot of the heavy lifting for you. A fairly common matching formula is that the company tosses in 50 cents for every dollar an employee contributes to the plan, up to six percent of salary. With that setup, someone making $50,000 would need to set aside just $275 or so of his or her own money; the other $125 being chipped in as the company matching contribution.
I appreciate that saving anything right now isn't a breeze for Gen Y. But when you recast the challenge from the off-putting $2 million "number" to a more digestible $300-$400 a month you actually might help future generations do a hell of a lot better job prepping for retirement. (EBRI data show that about 75 percent of workers age 55+ have less than $250,000 saved up.) And if anyone is interested in giving Gen Y truly helpful advice, how about ramping up the headlines over what a great opportunity you have at 25, if you're able to grab it?
To get to that $2 million starting at age 25 using the earlier assumptions would require forking over $216,000 of your own money; compound growth would do the rest of the work. Wait until age 40 to start saving for retirement and it would take about $500,000 of your own money (~$1,400 a month) to have a shot at he same $2 million nest egg by age 70, assuming the same 8% annualized gain.
Ask Baby Boomers closing in on retirement about their planning regrets and the most common lament is that they wish they had started saving earlier. That's something worth passing along to Gen Y.
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