Why millennials should rely on their own savings and not government retirement programs
Posted May 4, 2016
The good news is that millennials are starting to save for retirement at a younger age than any previous generation.
The bad news is that growth rates for retirement savings accounts are expected to shrink considerably in the next 20 years.
According to new research from the McKinsey Global Institute, the past 30 years have graced North America and Western Europe with unusually high return rates on investments.
“The last 30 years saw a confluence of events that we probably won’t see again, like the decline in interest rates, the huge amount of new global GDP growth from emerging markets like China, women coming into the work force en masse and corporate profit growth rising to new highs,” McKinsey’s head of research, Sarah Lund, told Time.
Even though the market had its ups and downs between 1985 and 2014, the average annual return rate for investors was 7.9 percent — well above the 100-year average of 5 percent.
According to McKinsey, the conditions which allowed such high return rates will be tapering off in the next few years, leading to lower than expected growth. Rates as low as 4-5 percent are expected for the next 20 years.
As a result, those preparing for retirement will either have to save more or work longer in order to retire comfortably. This especially will affect young investors who are just starting to build their retirement nest egg.
McKinsey estimates that a 30-year-old who starts saving for retirement today will either have to save 80 percent more money or work for an extra seven years in order to keep pace with their retirement expectations.
The situation is exacerbated when you consider the unsustainable trajectory for government retirement programs like Social Security and Medicare.
According to Money, in 2015 the government spent $1.9 trillion on Social Security and Medicare — over half of the fed's total spending of $3.7 trillion. Social Security's annual report suggests that by the year 2034, funds for both programs will be totally depleted.
In other words, millennials shouldn't expect Social Security to bail them out if they don't save enough money for retirement unless the program sees a massive overhaul in the near future. Even then, retirees will likely rely on a lot more of their own money.