41% of Millennials Aren't Saving Through the Stock Market, and It Could Cost Them Millions

A LendEDU market analysis compares retirement savings via investing in the stock market versus through a normal savings account.

Head shot woman anxious worried millennial woman fizkes / Shutterstock

You’ve likely read the countless stories that criticize millennials for not saving for retirement.

These articles get one thing right: you should begin saving for retirement as soon as possible. However, retirement saving strategies are not as commonly discussed.

Because how you save for retirement is just as important as when you begin building your retirement nest egg.

A study from financial website LendEDU explored this idea and found that nearly half of millennials could be losing out on almost $3.5 million by saving for retirement through a savings account, instead of through an investment account like an IRA, 401(k), mutual fund or individual brokerage account.

How are you saving for retirement?

To begin our study, 502 millennials that indicated they were saving money for retirement were asked how they were specifically saving for retirement. This is what we found:

  • 59% were saving for retirement through an investment account like an IRA, 401(k), mutual fund, or an individual brokerage account.
  • 41% were saving for retirement through a savings account.

With this information, we calculated how much money this 41% of millennials could be losing out on by not utilizing the stock market when saving for retirement.

By not saving via investing, millennials could be losing out on $3.5 million

As the graphics above indicate, millennials that are not saving for retirement through an investment account like a 401(k) could potentially be missing out on nearly $3.5 million extra in savings.

While retirement savings stay relatively close to each other through the initial stages, a savings account simply does not keep pace with the returns produced by the stock market in addition to compounding interest over time.

Over a 38-year period, using a savings account would put a millennial’s retirement balance at a projected $1.49 million, while an investing account projects $4.95 million.

How we arrived at these projections

To arrive at these retirement savings projections, LendEDU completed a fairly extensive market analysis. Here’s how we did it:

  • The average age amongst survey respondents was 27, while the traditional age of retirement is 65. These calculations were meant to display the likely differences in wealth that a 27-year-old saving for retirement today would recognize in 38 years depending on his or her chosen method of saving.
  • The starting salary of the hypothetical saver was $40,352, which was determined by annualizing the median weekly earnings of 25-34-year-olds as provided by The Bureau of Labor Statistics. The salary was then increased year over year by 3.7% to adjust for inflation in accordance with the average consumer price index data for the time period studied. Annual savings were calculated as 20% of the given year’s salary following the 50/30/20 rule of thumb (50% necessity, 30% discretionary, 20% savings).
  • Nominal investment returns were calculated by taking the geometric mean of annual S&P 500 returns over the 40-year period starting in 1976 and ending in 2016 and accounting for reinvestment of dividends. Fees of 0.70% were subtracted annually from investment returns in accordance with an average mutual fund expense ratio reported by the Investment Company Institute. Savings account interest rate data was unavailable for the full period studied and therefore nominal 3-Month Treasury Bill returns were used as a substitute.
  • In order to correctly compare resulting wealth balances at the end of the 38-year period, we had to determine growth rates for the different saving methods.
  • The resulting cash balance was determined by calculating out, over 38 years, the accumulated savings of a 27-year-old with a starting salary of $40,352. This person would consistently save 20% of his income per year in the form of cash while continually experiencing a 3.7% annual increase in salary due to inflation. The resulting cash balance at the time of retirement would be $681,512.96.
  • The ending savings account balance was determined by using the same contribution method as previously mentioned but also factoring in interest returns. Calculating the geometric mean of U.S. 3-Month Treasury Bonds over the past 40 years resulted in an average of 4.61% annual growth before inflation. By the time the 27-year-old retired at age 65, the savings account balance would equal about $1.49 million.
  • The investment portfolio balance was found by using the same contribution method as before, but also by calculating the geometric mean of S&P 500 returns over the last 40 years and applying it as annual growth. This calculation resulted in an average increase of 10.96% per year before inflation. After compounding, the resulting portfolio balance would total about $4.95 million.

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