If the market goes south, millennials are going to take it on the chin.
According to an analysis from NerdWallet, a potential drop in stock market returns could mean that if millennials don’t boost their retirement savings—in a big way—they could really be hurting by the time they’re ready to retire. Or would have been ready to retire.
NerdWallet cited recent analyst predictions that the slower growth of the U.S. economy after the Great Recession could cause stock market returns to fall from their current annual average of 7 percent to a possible 5 percent in the decades ahead. That, it said, could really hurt investors.
And while 2 percent may not sound like much, when considered over time—as advisors are always wont to say—it adds up to a substantial number. NerdWallet analyzed just how much that drop could add up to, particularly for young workers at the beginning of their retirement savings.
It’s not a pretty picture. Millennials, it found, who could earn a 5 percent return over the bulk of their investing lifetimes, might end up having to save a whopping 22 percent of their annual income to make up that 2 percent loss. Most retirement experts currently recommend saving 15 percent of annual income.
The analysis showed that a 25-year-old earning $40,000, the median average salary for ages 25–29, according to the U.S. Census Bureau’s 2015 Current Population Survey, could have gotten away with a savings rate of 13 percent to replace 80 percent of his or her income by age 67. That’s based on the 7 percent average annual stock market return since the 1950s.
However, if that average does fall to 5 percent, NerdWallet’s analysis shows that that same 25-year-old will have to set aside 22 percent of annual income to save the same amount. That’s an increase of $3,400 just for this year—and it’s equivalent to more than three months of rent, based on the median monthly rent of $937 for 25- to 29-year-old households.
Whether already-pressured millennials coping with lower-paying jobs and high levels of student loan debt can manage to do that for their whole careers remains to be seen.
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