Although many financial planners stress that employees ages 18 to 34 should contribute at least 15% of income into their 401(k) plans, a survey by Scarborough Capital Management found only 22.5% of individuals within that age group are doing so.
Still, the survey found that 72.8% of this age group are investing anywhere from one to 10% of their paycheck into a 401(k). Moreover, 58.5% of Millennials are able to save between 5% and 10%.
Gregory Ostrowski, a financial planner with the firm, believes it’s a sign that this generation is developing better money-management habits. “Understanding the need to save, the ability to obtain ‘free money’ from an employer match—if available—and the overall concept of slicing off some of the budget for the future is a wonderful start,” he says.
But Ostrowski cautions that Millennials have plenty of room for improvement.
“In reality, we need to see savings rates toward 15% to have the type of long-term outcomes most are looking for,” Ostrowski explains. “A 15% deferral rate over the course of a career puts a saver in a better position to have a similar lifestyle in retirement as they had during their working career.”
Nonetheless, Ostrowski acknowledges this would be no easy task, and that merely setting financial goals is a stretch away from taking action. “So many recent grads have faced the perfect storm: they’re saddled with student loan debt, many have faced a brutally competitive job market, and those with jobs have seen little to no wage growth. It’s tough to carve off savings when everything’s already accounted for.”
But everyone needs to start somewhere, and Millennials at least have time on their side. Like several certified financial planners (CFPs), he says there is no rush in saving so much right away. “Start small. At the very least, if your employer has a 401(k) match, do everything in your power to get it. If you can save 5% or 6% and you’re getting another 5% or 6% from them on top of that, then you have doubled your savings rate.”
Ostrowski notes that those without access to an employer match still benefit from compounding.
He suggests “start at 4% and set a note on the calendar to increase by 1% every 6 months. I’ve advised hundreds of young savers over the years on this technique and it’s a great way to incrementally make moves in the right direction, and in a way that your cash flow is not crimped all at once.”
The full results of the survey can be found at www.scmadvice.com/401k-pulse-report.Research Now conducted a nationally representative digital survey on behalf of Scarborough Capital Management from February 10, 2016, through February 17, 2016, with responses from 1,004 Americans throughout the United States older than 18 with 401(k)s.