Young workers today probably can't even think about retiring for 40 or 50 years. Longer lives and the prospect of weaker investment returns mean millennials will probably have to save more money, over a longer period of time, than their parents and grandparents. And the earlier they start saving, the easier it will be to accumulate a nice nest egg.
Yet it's not easy to sacrifice now for something that won't happen until the 2060s.
When millennials are asked, they say retirement is a top priority. In a recent Charles Schwab survey, retirement was by far the first concern of all age groups. Millennials even put saving for retirement well ahead of student loans, credit card debt, and job security.
But if young workers are this worried about retirement, why aren't they doing something about it?
It looks like they need a nudge to make the right decisions. That's one takeaway from data T. Rowe Price Retirement Plan Services shared that offer a window on how seriously millennials—and other generations—are taking retirement savings. The company runs 401(k)-style plans for almost 1.9 million people.
Just getting started— filling out the paperwork to enroll in an employer's retirement plan— is an obstacle. When left to their own devices, just 30 percent of young workers get around to signing themselves up for their 401(k) plans. More than half of workers in their 30s, 40s, 50s, and early 60s voluntarily take this step.
Many companies have started automatically signing up workers for 401(k)s. Employees can decline to participate, but the idea is that very few will bother. According to T. Rowe Price's data, this is working. Among 20-something workers, 84 percent go along with being auto-enrolled in a 40(k) plan.
Younger workers also contribute a smaller percentage of their salaries to T. Rowe Price retirement plans than older workers do. This makes some sense. Workers who start saving early don't need to save as much as older workers who are playing catch-up. And younger workers, who are typically paid less than their elders, often have a harder time finding money to put away.
But most experts recommend devoting 10 percent or 15 percent of your pay to retirement, including employer contributions. The average young worker is less than halfway there.
In some areas, millennials are making smarter decisions than older savers. For example, workers under 40 are far more likely to be using Roth 401(k) retirement accounts, according to T. Rowe Price's data.
Roth accounts take after-tax money, so they don't provide the same immediate tax break as traditional accounts, which take pretax money. But investment gains in a Roth are never taxed, while retirees must pay income taxes on withdrawals from traditional 401(k) and individual retirement accounts. The benefits of Roth accounts are clearest for younger workers, though recent research suggests all workers can benefit from a mix of Roth and traditional assets.
Only 6.7 percent of all worker contributions went to Roth accounts last year, according to T. Rowe Price, but that's up 43 percent in just two years. Employees in their 20s make 8.1 percent of contributions to Roth options.
Millennials are less and less likely to raid their 401(k) accounts for today's needs. Workers in their 20s are half as likely as all employees to borrow money from their 401(k). While workers over 40 have taken out more 401(k) loans over the past two years, young workers are borrowing less often.
Young workers are often tempted to cash out small 401(k) balances when they hop from job to job, even though these early withdrawals come with a 10 percent penalty. But more and more workers are going through the hassle of rolling these balances over into new 401(k)s or IRAs. The share of 20-something participants cashing out their 401(k) is down 10 percent over the past two years.