Mark Hulbert: Millennials need help with retirement math

I don’t know whether to laugh or cry reading about millennials’ attitudes toward retirement.

Millennials, of course, are those who were born between 1979 and 2000, who therefore currently are between 19 and 41 years old. The Transamerica Center for Retirement Studies recently surveyed a large sample of them (2,156, to be exact) to gauge how they are planning for retirement.

The fascinating results reveal how much these millennials have so far saved for retirement, how they are investing their retirement portfolios, and whether they expect their standard of living to increase when they do retire.

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Here are the specifics which made me question the millennials’ grasp of retirement math:

•The median millennial has saved $23,000 to support his retirement and is investing 10% of his annual salary in his 401(k) or similar retirement account.

•53% of millennials expect that their retirement savings accounts will be their primary source of retirement income, with 80% of them agreeing with the statement: “I am concerned that when I am ready to retire, Social Security will not be there for me.”

•39% of millennials have fairly equally divided their retirement portfolios between stocks and fixed income. 22% of them have more invested in fixed income than stocks.

•31% of millennials expect their retirement standard of living to improve when they retire. This percentage is higher than for other generations: Only 18% of Gen-Xers think their standard of living will go up after they retire; the comparable percentage among baby boomers is just 9%.

See if you can detect the internal contradictions in these responses. If you’re not sure, perhaps you too are kidding yourself about how much you need to save and invest for retirement.

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Let’s review the forbidding math. Let’s assume that our median millennial is 30 years old, having been born exactly half way through the date range that defines the generation, and that he intends to work until age 70. Let’s furthermore assume that his current salary also is at the median, which, according to the Pew Research Center, currently is $69,000. We will also assume that his salary grows each year by 1% more than inflation, and that he continues each year to save and invest 10% of his salary.

Let’s also assume that his 401(k) appreciates at an annualized rate of 4% above inflation. That reflects a portfolio that is divided equally between stocks and bonds and these two asset classes’ historical returns over the last century.

Given these assumptions, his portfolio at retirement will be worth $879,838 in today’s dollars. Assuming he adheres to the 4% spending rule, that means his 401(k) will produce annual income of $35,194. That’s just 34% of what his salary will be in his final year of employment.

How, then, can this hypothetical millennial possibly believe that his standard of living will increase when he retires?

Be my guest playing around with these assumptions. You still will not come anywhere close to justifying this median millennial’s expectations.

You could, for example, assume that the millennial’s portfolio is 100% invested in equities rather than divided equally between stocks and bonds. That is the conventional advice for investors who are several decades away from retiring. Nevertheless, assuming the future is like the past, his annual retirement income, though higher, will still be only 57% of his final working year’s salary.

What if you assume that the millennial saves and invests 15% of his annual salary in all his retirement accounts rather than 10%? Closer, but still no cigar. Now his portfolio will generate annual retirement income that is 81% of his salary the final year of his employment.

Many retirement planners assume that Social Security will make up the shortfall. But notice that 80% of millennials aren’t counting on Social Security being there for them.

The bottom line? Maintaining your standard of living as you transition into retirement is not easy. Millennials either need to scale back their expectations about their retirement income or aggressively save and invest in their retirement portfolios.

Don’t make the same mistake yourself.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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