Despite facing financial retirement planning hurdles, Millennials are coming out on top with their retirement savings.
That’s the latest finding from Vanguard’s newest Retirement Readiness report, released today, which finds Millennials workers are set to replace 58% of their prior earnings during retirement, and eight percentage points over what was estimated for Baby Boomers.
Using its new forecasting tool, the Vanguard Retirement Readiness Model (VRMM), Vanguard divides its cohorts into three generations: early Millennials (ages 37-41); mid-Generation X (ages 49-53); and late Baby Boomers (ages 61-65). For each, Vanguard estimates generational readiness at four points from the national income distribution—the 25th, 50th, 70th, and 95th percentiles.
The research found that early Millennials at the 50th income percentile were on track to reach a sustainable replacement rate of 66%, and 15 percentage points higher than median-income late Baby Boomers. This level will also allow the younger cohort to meet their projected spending needs in retirement, Vanguard said.
The asset manager points to progressive developments within the retirement industry for the reason behind an increase in savings. Millennials, many of whom entered the workforce in 2000s and decades after the 401(k) plan was developed and implemented into plans, benefited from automatic enrollment and escalation features and other modern plan designs.
“Notably, although many portray younger generations as facing more hurdles for retirement savings, this Vanguard research demonstrates that Millennial and Gen X savers have benefitted significantly from improved defined contribution plan design that encourages saving and investing in age-appropriate asset allocations,” said Fiona Greig, global head of investor research and policy at Vanguard.
The research also assessed retirement readiness outlooks between higher and lower-income households, finding that among late Baby Boomers, high-income workers are on track to meet their retirement spending needs, while low- and middle-income workers were off track.
Across all generations, workers at the 25th income percentile saw a projected retirement savings gap of 32%, whereas high-income families were projected to have a savings surplus of 20% based on expected spending needs, found Vanguard. Generations at the 50th percentile had a 33% lower replacement rate than what their anticipated spending needs were.
Vanguard says its research underscores the progress still needed for workers to reach their retirement income needs and urges policymakers to connect employees—like low-income workers—with capital market to reduce projected retirement readiness gaps.
On the other hand, employers can help workers save adequately by adopting best practices that include automatic features and diversified equity and fixed income portfolio investments.
SEE ALSO: