The Saving-Too-Little Myth

SMITH BRAIN TRUST – This isn’t another article about avocado toast, the delicious scapegoat to an entire generation’s money problems.

A trendy breakfast is unlikely to thwart the retirement intentions of the millennial generation, says Maryland Smith’s Albert (Pete) Kyle. Millennials likely will do just fine in saving for retirement. For those who are unsure, he offers six sound money tips.

Members of the younger, millennial generation, many of whom came of working age in the grips of the Great Recession, have been slower to invest than previous generations and generally more distrustful of a financial system blamed for systemic abuses that contributed to the cause of the global crisis.

The established narrative about millennials is that they are saving less than previous generations did. It’s worrying, the narrative goes, as fewer and fewer companies offer defined benefit retirement plans. 

“All this stuff about people not saving enough for retirement, that may be true,” says Kyle, the Charles E. Smith Chair in Finance at the University of Maryland’s Robert H. Smith School of Business. “But it’s not new. The idea that people aren’t saving enough, that’s been around since I was in my 20s and 30s. And it was completely wrong.”

Average incomes of seniors in the United States have grown higher relative to the average incomes of everybody else in the economy, he says. And though millennials – people born between the early 1980s and the mid 1990s – are less likely to work for a company that offers a defined benefit pension plan, those perks were never ubiquitous. Less than one-third of U.S. workers ever qualified for such programs, he says. 

“And those are the types of professionals that nowadays will max out their 401(k)s,” he says. “And and people who max out their 401(k)s will do fine in retirement if they work for a reasonable number of years.” 

For most people, that means working until age 67 or later, he says. Longer life expectancies means longer retirement expectancies and, therefore, larger savings requirements.

For millennials, and members of Generation Z, which is just beginning to enter the workforce, he offers these six tips about saving for your retirement:

1. Avoid credit card debt by living within your means.

2. Max out your 401(k) contributions each year if possible.

3. Buy and hold diversified mutual funds with low fees.

4. Tilt asset exposure toward equities while you are young.

5. Ignore professional investment advice except from a fiduciary under the Employee Retirement Income Security Act (ERISA)

6. Do not assume that home ownership is a good investment. Do your homework, and rent if it makes better money sense.