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(Bloomberg) — Millennials often worry they’ll never retire. Turns out, a lot are better situated than baby boomers.
That’s according to a Vanguard Retirement Readiness report that found older millennials, across most incomes, are on track to retire with a closer level of income-to-spending needs than both Gen X and late baby boomers.
Millennials are facing higher education, housing and health care costs and are less likely to enjoy the same level of Social Security benefits and income from a pension. But changes in the way retirement funds are drawn and invested are putting millennials between the ages of 37 to 41 on track for a more comfortable retirement, as measured by Vanguard Group.
The investment management company gauges retirement readiness by comparing projected income against expected spending — both as a percentage of pre-retirement income.
For example, in the 70th percentile of wage earners — those making a median income of $61,000 — workers are estimated to need about 68% of their annual salary once they retire. But only millennials in that income bracket were close to meeting the projected level of necessary income. They are on track to have a “sustainable replacement rate,” as Vanguard calls it, of 66%. Meanwhile, late baby boomers — those ages 61 to 65 — had a rate of 51%, and Gen X had a rate of 53%.
Vanguard attributes millennials’ brighter outlook to changes in the retirement industry including a push to automatically enroll workers in plans; default more workers into defined contribution plans at 5%; automatically increase the percentage of pre-tax salary deferred each year; and make diversified target-date funds widely available.
Still, across most incomes, there is a gap between what is saved and needed.
Vanguard — whose replacement rate analysis largely didn’t take into consideration home equity — said that gap was likely to grow across all generations as well, if cuts to Social Security benefits materialize over the next decade.
A 23% cut, for instance, would reduce each generation’s sustainable replacement rate by about 10 percentage points, with those earning less seeing a bigger hit, according to the report.
Vanguard’s analysis was developed using data from the Federal Reserve Board’s Survey of Consumer Finances, along with data from the National Income and Product Account, the Federal Reserve’s Financial Accounts, and the Society of Actuaries.
To contact the author of this story:
Suzanne Woolley in New York at [email protected]
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