Millennials get a bad rap when it comes to retirement planning, but a recent study by investment experts at Merrill Edge sheds some light on the new spending and saving patterns of young people today. The key difference for the newest generation of adults is a distinction between saving and retirement saving. Many surveys about investing and retirement focus on savings as a form of retirement security --- but this ends up offering biased opinions and muddying the picture.
According to the study, today's young adults tend to save a percentage of their income. They save almost 20% on average, more than boomers, Gen Xers, or seniors. Interestingly, there's also a difference in perception about saving habits across generations. 54% percent of surveys held that seniors are "very good savers." Millennials? Only 8%. So, even though Millennials are saving more than their elders, many personal finance surveys are poorly worded and biased in favour of traditional saving concepts.
If Millennials are saving so much and they typically don't focus on retirement planning, then what are they saving for?
It turns out that experiences, avoiding debt for big purchases, and down payments are the major drivers. Millennials tend to save for very different reasons than their parents or grandparents did at their age. Today, young people don't have the same purchasing power and low home prices that past generations did. Saving up for a 20% down payment on a house today can take many long years of careful saving. My parents bought their house for the equivalent of two years' of income in the early 80s — good luck doing that today!
On top of this, the traditional life script — getting a job, house, marriage, kids, retirement — is no longer in effect. Young people are changing their expectations and life goals, and the modern age brings a new perspective to financial planning and retirement saving. Young people value flexibility and freedom over safety and security, and travel and unique experiences are not just for the wrinkled and wise. Why wait for your golden years to see the world? The investment horizon for young people is often 10 years or less. That certainly wasn't the case for their parents' generation, which focused on saving for retirement security 30 years down the line.
One of the most interesting aspects of the survey was the "I am saving to..." section. Over half of Gen Xers and Boomers agreed that "saving to leave the workforce" was a major reason why they saved their money. Only a third of Millennials agree — they prefer "saving to live my desired lifestyle" instead. The other groups liked that idea, but Millennials were the only ones to choose this as the clearly winning motivation.
There are complex and diverse reasons for these changes, and it's difficult to parse the true causes. Millennials' urge to spend on brunch and avocado toast is only part of the answer. Senator Elizabeth Warren delivered an amazing keynote speech at UC Berkeley when she was still a scholar and researcher. No matter where you fall on the political spectrum, it's hard to deny the drop in real working wages for many people in the Western world. Inflation is a poorly understood concept, and the effects of technology are visibly in labor market changes over the years. The sad fact is that many young people today face precarious and uncertain working conditions. Saving your income is a powerful tool to expand your options and avoid the pitfalls of modern life.
Millennials aren't working to stop working in the future. Instead, they’re working to increase their enjoyment of life, now and later. Trade-offs are a part of making financial decisions, and Millennials seem to be opting for a different balance between vacations and early retirement. Saving for the future is a powerful concept — our ancient ancestors understood the importance of harvesting seeds for the lean times to come. Today's modern youth have enjoyed a security and abundance beyond the dreams of 99% of the people who ever lived. So, why not risk it and take a few extra vacations before you need a walker?
My mother always said "money doesn’t make you happy — money gives you options." I was never much of a saver compared to my miserly little brother, but I learned to save at any early age. It always bugs me when I read yet another story about how my generation doesn't understand money.
The world is a different place now — and no one can predict what the labor market will look like in 2050. Retirement as a traditional concept is no longer the reality or the desire of young people today. Our parents and grandparents lived through many experiences and learned lessons that apply today, but I think we have a lot to teach older generations, too.
What do you think about saving for retirement versus saving to live the life you want today? It’s a personal subject, but a fascinating topic to dive into. Share this article with your friends and see what their plans are. Let’s keep the conversation going!