Putting money to work earlier allows more time for savings to grow
Millennials are more bullish than any other generation about their retirement savings, a major new study has found[1]. But with time on their side, should they be doing more?
A lmost two fifths (38%) of millennial investors (aged between 18 and 37) globally are very confident they are saving enough now so they won’t run out of money in their retirement. That is more than 29% for Generation X (aged between 38 and 50) and 21% for Baby Boomers (aged between 51 and 70).
Bucking a common myth
Millennials say they are saving on average 15.9% (including employer contributions) of their income (wages plus any other earnings) specifically for their retirement. That too is more than Gen Xers (14.7%) and Baby Boomers (13.7%).
The results of the study appear to buck a common myth that millennials aren’t doing enough to save for their retirement. On the contrary, millennials appear to be saving a reasonable amount for their retirement, which is encouraging.
Miracle of compounding
The one thing that millennials have on their side over older generations is time, with up to 40 years or more until they are due to retire. Putting their money to work earlier allows more time for their savings to grow. It could also mean less of a scramble in the latter part of their careers if they have to make up shortfalls.
By starting early, millennials benefit more from the miracle of compounding – or, as Einstein called it, ‘the eighth wonder of the world’. Compounding involves earning a return not only on your original savings but also on the accumulated interest, or returns, earned on your past savings. That is why total contributions should be less the earlier you start saving, because you can earn returns on returns over a longer period.
Factors to consider
There are, of course, other factors to consider. Returns are by no means guaranteed, and careers can fluctuate too. Still, millennials are doing more than most when it comes to saving for retirement.
GIS 2019 found that millennials are saving more than the average non-retired investor aged 38 and above in most (20 out of 32) of the locations in which they live. Belgium (+9.0%), Austria (+8.5%) and Portugal (+5.3%) were the three locations where the disparity was highest between what millennials and non-millennials were saving, on average.
Source data:
[1] Schroders Global Investor Study (GIS) 2019, gathered from views of more than 25,000 investors in 32 locations around the world.
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