73 Will Be The Retirement Norm For Millennials

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Key Takeaways:

  • Most of today’s college grads won’t be able to retire until 73 due to high debt load —12 years later than the current average retirement age
  • Given a life expectancy of 84, grads will only have 11 years to enjoy retirement
  • The median debt load of $23,300 will cost students over $115,000 (in today’s dollars) by the time they retire
  • Employer 401(k) matches are crucial, and will compose 50% of retirement savings

Student Debt Will Follow Graduates To Retirement

With the total amount of outstanding student debt approaching $1 trillion, the plight of debt-straddled college students is more important than ever. In the past 30 years, not only has the number of high school graduates enrolled in four-year universities increased by 11%, but college tuition has also soared over 200%. As more students attend college at a cost higher than ever before, Millennials have increasingly turned to loans to help finance their education. While much of the college debt dialogue is over immediate issues like employment and repayment, there is another glaring challenge that graduates will have to deal with for years to come: retirement.

When will students be able to retire given that many are spending the first ten years (or more) of their careers paying off their hefty loans? NerdWallet conducted a study that examined the financial profile of a typical college graduate and found that while retirement is certainly not impossible, for most it will have to wait until their early to mid 70s— over 10 years later than the current average retirement age of 61.

Quick Facts On Students And Their Debt

Here are some quick facts to give context on exactly what students are grappling with:

  • Median debt for a student upon graduation: $23,300
  • Percentage of students who are unemployed at graduation: 18%
  • The median starting salary for those who do have jobs: $45,327
  • Standard loan repayment plan: 10 years
  • Average yearly loan repayment: $2,858
  • Number of college graduates currently estimated to be in default: Over 7 million

$23,300 In Loans Ends Up Costing $115,096 By Retirement

The goal of the study was to find realistic retirement projections for the typical college graduate and create projections that applied to a broad range of students. The study compared three different financial profiles: the median graduate, with median debt and salary; the struggling graduate, with high debt and a below average salary; and well-off graduate, with low debt and an above-average salary.

Graduate Retirement Outcomes

Clearly, student debt has an impact on retirement outcomes. Currently, the average retirement age is 61. But for most of today’s college grads, the realistic retirement age will be closer to their mid-70s. Given an average life expectancy of 84, this will leave only 10-12 years for people to spend in retirement. The main reason for this is that although the median college graduate leaves with a seemingly manageable $23,300 debt load, 7% of a student’s earnings go toward yearly loan payments of $2,858 for the first ten years of his or her career. This prevents any meaningful contributions toward retirement. In fact, by the age of 33, when the typical college grad has finally paid off their standard 10-year loans, he or she can only be expected to have saved $2,466 for retirement—over $30,000 less than if the student had graduated with no debt. Even worse, the foregone savings carry a serious opportunity cost, as this money would have been earning a compounded rate of return every year until retirement. At the projected retirement age of 73, the lost savings directly attributable to student debt is $115,096, nearly 28% of total retirement savings.

Surprisingly, for the struggling graduate, the retirement outcome isn’t dramatically different. Despite being in nearly twice as much debt and starting with 10% less pay, the expected retirement age is still just 75, only two years later than the median case. The main reason for this is social security. Much has been discussed about whether or not social security will be around by the time Millennials retire. To be conservative, social security benefits are factored into the study at $11,070 (75% of current average) per year beginning at age 67. That said, a substantial reduction in benefits or the disappearance of the program altogether would significantly alter the retirement equation. If the current social security payouts were to remain unchanged for the next 50 years, the benefits would provide future retirees a significant boost by covering nearly 15% of their required yearly income in retirement.

Well-off Grads Retire 7 Years Earlier

The retirement prospects for the well-off grad are significantly better than the others as illustrated in the graph above.  By graduating with a reduced debt load and landing a job that pays 22% more, the well-off grad can expect to retire at age 67. This is a huge departure from the other cases, and demonstrates the importance of contributing to a retirement plan early on in one’s career. Compared to the median grad, the extra $40,406 that the well-off graduate is able to contribute during the first ten years of his or her career results in a $446,452 difference in retirement savings by age 73.

So How Do You Beat The Odds?

Given these circumstances, should students resign themselves to an eternity of work with little to look forward to in their latter years? Not necessarily. Though an increasing retirement age does appear to be an inevitable economic reality, being conscious of this problem and tailoring financial and career planning accordingly can go a long way toward achieving retirement objectives. There are many factors that influence the ultimate age at which people are able to retire, but there are a few variables that have a particularly large impact. Making above-average yearly contributions to a retirement account, working for an organization with a decent 401(k) match, and making sure to invest money in index tracking mutual funds are three ways to help add years to retirement.

Employer 401(k) Match Is Crucial

As fewer and fewer companies offer defined benefit plans, Millennials will have to depend upon employer 401(k) plans to save for retirement. According to a recent Fidelity survey, the current median yearly matching contribution is $3,420. As shown below, these employer contributions are expected to make up roughly 50% of the retirement equation for Millennials. By working for a company that offers a yearly matching contribution of $4,420 ($1,000 more than the median), potential retirees can reduce their expected retirement age by up to three years.

 401(k) Match Composes Half of Retirement Savings

Make Above-average Contributions To Retirement Accounts

While working for a generous employer can do wonders for retirement, not everyone is in a position to be overly selective about whom to work for. Another important component of retirement planning is the yearly contribution rate. Making above-average contributions can significantly improve retirement outcomes. Though the study projects a 6% annual post-tax contribution (the average personal savings rate for Americans), increasing that number to 10% reduces the expected age of retirement from 73 to 69.

Invest In Index Funds

Contributing money towards retirement won’t be helpful if the money is simply left in a savings account or a CD. To earn a return, Millennials need to be willing to take some risk and construct an equity-oriented portfolio. This may be difficult for today’s grads who have seen the stock market seemingly implode every five years, but unfortunately, retirement will be impossible if people invest too conservatively. The study assumed a 6% yearly return on retirement savings which is a conservative figure given the historical performance of the market. That said, it is a rate of return that can’t be achieved by completely avoiding equity exposure. The best way for an individual to overcome this problem is by investing in index tracking mutual funds, which will offer a market return with low fees.

Retirement Isn’t Hopeless, But It Will Be Difficult

Far more than their parents, Millennials will have to rely upon proactive financial management to achieve their retirement goals. Each generation is afflicted with distinctive financial ills, but the challenge of college debt is unique to Millennials. The decline of pension plans, the uncertainty surrounding social security and the college debt epidemic have placed the onus on graduates to make conscious, forward-thinking decisions about their retirement.

Methodology

Future retirement statistics were projected by profiling three potential situations that students might find themselves: the median graduate, with median student debt and median starting salary; the struggling graduate, with a high debt load and a below-average salary; and the well-off graduate, with a low debt load and an above-average salary. The study factored in a range of other relevant variables to create the projections: average 2012 social security benefit, average 2012 401(k) match, 30 year average national salary growth rate, 30 year average inflation rate, 30 year annualized S&P 500 returns, life expectancy, 30 year average personal savings rate, 2012 Stafford loan interest rates, and standard loan repayment terms.

All projected figures are inflation adjusted and discounted back to 2013 dollar-terms.

Data Sources:

Bureau of Economic Analysis
Bureau of Labor Statistics
Fidelity Investments
National Association of Colleges and Employers
New York Federal Reserve
Pew Research Center
Social Security Administration
World Bank
Consumer Financial Protection Bureau

Read More From NerdWallet:

  • Payless 4 college.Com

    Excellent Article.. I recommend that every Family senting their student to College should read it. Understand the Numbers to understand the true cost of college.

    College is still and excellent investment of time and money. Yet, one is wise to set their Goals and focus on completing them as soon as possible.

    Every Extra Year of college increase the student loan debt for most students. That increase in student loans increases the total cost of college. That reduces the amount that can be saved and invested for their own retirement.Being a College student is one of life great chapters. Yet, Retirement last much longer than college. Without Savings to make retirement fun it will be anything but fun..

    • Ralph Parker

      I think it is time for an anti college movement! The colleges could save their customers a ton of money by reducing their curriculum to only include essential classes and provide an online system to meet the other classes that they have historically imposed for a minimal charge. But they won’t, it is too much about money.

  • David

    The posted retirement age of 60 is completely inaccurate to begin with. People live longer and are in better health, so unless you are rich to begin with retirement at 60 is a joke. I plan on retiring at 70, but may work longer if I decide to. I enjoy my job and the people I work with and find it mentally challenging. I have a ton of outside things I enjoy but since I work in higher ed, I have plenty of time off to enjoy them. Being bored to death is the worst thing about retirement, got to keep the mind and body healthy!!

    • JJ

      We should all be so lucky as to bask in the radiance of your vast knowledge.
      It truly is refreshing to know of someone who has life figured out at such a young age.
      Ah, I remember when my knowledge was boundless, about 16 years of age…

  • Paul Curley

    529 plans can help solve this issue of college affordability.

  • rwscid

    The article trys to say too much, as a result says too little. If you save money and reduce your expenses you can retire pretty much any time you want. If not, you can’t. It is not a math problem, it is a question of how you prioritize your life.

    • dgauss

      I feel this simplifies life a little too much as well. This leaves out any change of emergency and/or act of god scenario.

      • rwscid

        The only relevant act of ‘god’ for Americans is the one that caused them to be born Americans, after which their lives became incredibly easy. Several billion people prove, every year, it is possible to survive on less than $2.50 per day. If you simply must let your heart bleed for someone, let it bleed for them.

        • Ralph Parker

          Where everyone makes $1/day you can buy your basic necessities for $1/day. Where everyone makes $100/day you can’t buy anything for $1.

          • rwscid

            A pound of beans or rice or corn costs more or less the same everywhere in the world.

            Tradable goods are generally priced the same throughout all the areas in which they are traded. Non-perishable food, the staple of most poor people’s diets, costs just about the same all around the world, unless politicians have made it cost less through subsidies or more through tariffs.

            PPP adjustments allow us to compare income, and what it will buy, between nations as diverse as Luxembourg and Eritrea.

      • Joseph Egoian

        We could not model “act of god” scenarios into our study.

    • BenguluruHuduga

      No. you got it inverted. Add in the necessities of life. Responsible families pay for kids college, ( 100K today ), pay down their home mortgages ( 300-400K ) and try to save for retirement. Here is the problem, retirement age is 66 today. People are working longer because of fluctuations in the economy. Those who wanted to retire in 2008 got undone by the financial crisis and had to push the retirement. Personal incomes are not rising. Career growth is almost non existant due to pyramid structure of growth. If life was that simple as you speak, articles such as this one, will not be published.

  • Akayr

    Starting salary for “struggling” graduate is $40K? Are you serious? That data seems like it comes from a flawed source.

    • Poster

      $40K a year. Wealthy! I wish I could make that much and I graduated 35 years ago. Never made anywhere near that much.

  • Matthew Robinson

    why are you reading this. you should be reading mr money mustache.

  • Beth Hutton

    Yeah, well they said 67 would be the retirement age for the boomers, but I retired at 54, seven years earlier. Do this and do the same or better:

    *Get that first ok job and move back in with your relatives for a year or two and start saving. The more willing you are to pitch in on housework/grocery shopping /cooking /handyman-woman stuff, the longer they will put up with you. You millenials are doing this in droves, I know, but I did it too and I can tell you from first hand experience, it pays off big time down the road. Early savings are very important.

    * Every time you get a raise at work or unexpected earnings, direct it into savings, and cascade your savings into long-term investments. Savings compound if you’re smart where you put them.

    * As for major ticket items (cars, boats and the like) buy only used, at least until you are within a short shot of retirement. Living frugally is the second main key to retiring early, see also the next item. Buy house or don’t based on your instincts.

    *DIY as much as possible. That applies to cooking for yourself, carpentry, sewing basic plumbing or whatever else you know how to do. You can save a ton this way.

    *Pay attention to the changing laws that affect your retirement savings and take action to keep your returns maximized. This is hard if you have a high-attention job, but at least review your plans every other year. If you have a super-high-stress-high-pay job, get a financial planner.

    *Make sure you always have health insurance.

    * Believe in yourself! Be an optimistic overachiever (we boomers retiring early see ourselves as such, you can do it too). Go out and conquer the world, you can do it, really, we did, and so can you.

    * Good luck and may God bless you.

  • Dahn Shaulis

    More signs that the US working class are being crushed. Prepare to have a long work life (with little chance of retirement).

  • Theo Van Joolen

    unless you live in poverty in perpetuity [all too common now-a-days...I carry that honor], the stress of the student loan debt will more likely kill you by age 63!

    • Joseph Egoian

      High student debt loads should not result in suicide.

  • Theo Van Joolen

    the stress of long-term poverty is likely to kill you long before age 73. This is not just a numbers crunching game. Long term student debt is a public health issue. A major amnesty, or two, are absolutely essential for those who lost too many years in low-paying jobs.

  • BenguluruHuduga

    well, most corporates have a pyramid structure of growth. with retirement age growing. the pace of career growth will be slowing. it could well prompt the employer to terminate employees who haven’t shown growth in one’s career potentially leading to mid life crisis.

    • Ralph Parker

      It is tough when you fall behind a full work force. For instance, I hired in a company just prior to a long term freeze. That meant that there were a lot of folks just a little older than me. So they got and filled the higher positions and never left. So the promotional opportunities were slim. When the big one came, the one that I thought I would be ‘the one’, the younger generation had come in and still with the momentum of moving up the ladder got the promotion. I was left as the aged dinosaur.

  • Anne

    so what if you graduate when you are 43 and you owe 300,000 in student loans…I guess I’ll retire when I am dead. :-)

  • Sarah

    How are you defining retirement in this study? I can’t tell how you determined that $343,392 was enough for one person but another person needed over $800k. Are you basing it off of salary replacement percentages?

    And how did you get the $2466 number that students are “only be expected to have saved” in the 11 or 12 years since graduation?? You’re saying that college grads will only save about $250 a year? I honestly don’t think you’re giving Millenials enough credit, or maybe I just hang out with a lot of frugal people.

    • Joseph Egoian

      Appreciate the question Sarah. We are defining retirement at the age at which you could replace 80% of your peak salary yearly for the remainder of your life (we assumed a life expectancy of 84). So if your peak salary was $60k, your savings would have to provide you with $48k every year through age 84.

      There are two reasons why the well-off grad has significantly more savings at retirement than the other cases: 1) They have a greater peak salary, 2) their savings need to be able to cover an extra 6-8 years since they are retiring earlier

      • Carrie

        Does the 80% replacement of your peak salary include Social Security?

        • Joseph Egoian

          Hi Carrie,

          The 80% represents the total income that needs to be replaced through your retirement savings AND your Social Security benefits. We assumed that people would receive the current average monthly Social Security benefit of $1,269 ($15,228 yearly) beginning at age 67. To go back to the example above, if you have to replace $48k per year in retirement, $15,228 would come from Social Security while $32,772 would come from retirement savings.

          There has been a lot of discussion over the future of Social Security and whether or not it will be around by the time Millennials retire, but for the purposes of our study, we wanted to be as conservative as possible with our estimates. Despite assuming absolutely no decrease in Social Security benefits, we still found the expected retirement age to be in the mid-70s.

  • hardlyfast

    Beat the System:

    1) Start a business, very important because of the deductions are worth it, and you might make some serious money too.

    2) Buy real estate, buy the worst house in the best location possible, even (especially) if it’s a fixer.
    there are 2 advantages: a tax deduction for interest and equity can leverage your loan into a well paying investment.

    3) Invest in the market using dollar cost averaging, buy a diverse portfolio including stocks, bonds and CDs.

    4) Take advantage of tax free investments like roth IRAs and gov. bonds.

    5) Live somewhere you don’t need a car to live. Drive an economy car or truck, or not. Always buy the base model, with cash if possible.

    6) Once you’re getting set, buy a rental and leverage the bank’s money while getting rent.

    7) Live cheap and realize that money won’t buy you happiness but it will buy you some time and comfort while you are alive.

  • hardlyfast

    …or just do what I did and smoke crack all day… whatever, nerdwallet…idiotic name for a website btw..

  • Guest

    Average age of retirement is 61? Wow! All these people I know planning to work until 70. I am 57 and I make way less than $45,000 a year. I’m a college graduate and I never made near $45,000 a year. I was able to stay out of debt in college. I had $600 in savings. I also had no skills to get a job–college hadn’t prepared me for a well-paying job so I’ve always worked low wage jobs. My monthly wage dropped $1000 a month when I moved to Utah. I’ve only recovered $500 of it in 8 years. I even took night classes in word processing and medical terminology and transcription. That helped for awhile until there was more automation and those skills weren’t needed. I am looking towards semi-retirement at 62. I want to get out of Utah as soon as I can. I moved to Utah to take care of my mother. Now that she is gone there isn’t any reason to stay here and I don’t much care for it. I figure in another state no one is going to want to hire me at 62. I am hoping I can take odd jobs. I certainly don’t want to stay here until I’m 70. If you think you are going to work until you are 70 don’t kid yourself. I’ve see a lot of people shown the door at 61 and 62. I had a hard enough time finding a job when I was 49 and that was before the depression, which they call “The Great Recession” began.

  • Jesse

    Become an independent business owner with Amway. Work hard for 2-5 years creating assets that will allow you to retire. Retirement problem solved.

  • Nick Anderson

    Life expectancy today is 84 but that’s an aggregate measure for society, that’s not the life expectancy for Millennials, taking into account advancements in modern medicine today and over the next twenty years, the life expectancy for Millenials is north of a 100, with 100 serving as the rough equivalent of today’s 60 in terms of health and mobility. Given all that, a retirement age of 73 is a pretty sweet deal, at least for my generation.