Millennials’ retirement savings aren’t as good as they appear

Image: AP Photo/Sue Ogrocki
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Millennials are great retirement savers. That’s right, the generation often criticized for a sense of entitlement is being praised for taking responsibility for their far-off non-working years.

Surveys by retirement plan providers like  TransAmerica and T. Rowe Price have shown young Americans are making retirement savings a priority, participating in and contributing to their 401(k)s more than previous generations. Perhaps consistent with the stereotyping, millennials also think they’re doing a great job: 72% believe they are better off financially than their parents were at their age. But that looks like a bit of youthful hubris.

The first chart below is the share of Americans under 35 years old who had some money in a retirement account for the years 1989-2013. The second chart shows the median balance for those with such an account over that time.

From the above data it looks like millennials are indeed better savers than their parents. However, retirement savings are not the whole story.

The increase in retirement account participation reflects how 401(k)s and other plans have become much more popular in general. According to the Department of Labor, in 1989 only about 15% of workers had a retirement account, now more than 30% do. That’s because more employers offer 401(k)s, and many now automatically enroll employees into them.

When boomers started working, 401(k)s weren’t that common, but they had other ways of saving. In order to gauge the health of millennial finances, we need to look at those other sources of saving, too. The chart below shows median assets for Americans under 35.

While they have more retirement savings, millennials have less wealth overall.

It’s possible that simply having retirement accounts is causing young Americans to save less elsewhere. They might figure that by saving for retirement they don’t need an emergency fund. Or they may just be passive, and if they weren’t automatically enrolled in a 401(k) wouldn’t be saving at all. Research from Denmark suggests it’s probably the latter: Automatically putting a fraction of workers’ paychecks into retirement accounts created new savings that otherwise wouldn’t have been accumulated.

Savings don’t tell the whole story, either. Millennials are carrying heavy debt loads, with Americans under 35 years old saddled with median non-housing debt of $7,100 in 2013, compared to just $4,300 in 1989. They also face uncertain income prospects, according to research from the Social Security Administration.

High debt and uncertain earnings mean millennials probably need to be even more prudent than their parents. If most millennial wealth is in their retirement accounts, they may need to take loans or make withdrawals (and pay stiff penalties) during tough times. According to the TransAmerica survey, 20% of millennials have already taken a loan or withdrawal from their retirement account, only a slightly lower rate than older generations who have had their accounts for longer.

The good news is millennials are saving more for retirement than their parents did at their age. Many will save for the long-term and benefit from years of asset returns. But, overall, they are in worse financial shape than their parents. Unless they also start building up bigger emergency funds, all that good retirement saving may be for nothing.