How much will millennials need to retire

Millennials have more than enough financial worries. Now they can add about 2 million more to their list. That's how much many might need to save to retire.

Older Millennials — those born in the early 1980s — will need about $1.8 million salted away to maintain their standard of living in retirement while younger Millennials — those born in the late 1990s — will need upwards of $2.5 million, according to various studies, estimates and experts.

To be fair, that equation makes two big assumptions. One, it assumes they'd need to generate $30,000 to $40,000 in annual income from their nest eggs in today's dollars. And two, it assumes a 2% inflation rate, which is currently the Federal Reserve’s target rate.

So why do Millennials, aka Gen Y, need so much set aside? First, there’s the issue of inflation. Assuming a 2% inflation rate, a $1 million nest egg today would be worth about $530,000 in 32 years, which is when Millennials now in their mid-30s are expected to retire, and roughly $386,000 in 48 years, when the youngest Millennials are expected to call it quits.

What does this mean? Millennials who are behind the eight-ball will have to start saving aggressively now if they aspire to have the same standard of living in retirement as they did when working.

Why? One, they are unlikely to have a pension plan as did their grandparents. Plus, their Social Security benefits are likely to be less generous than today's. And if all that wasn’t reason enough, Millennials are projected to live even longer than current retirees.

The oldest Millennials, assuming they have no money set aside today and that they earn 5% on their investments, will need to sock away $2,000 a month for 32 years to accumulate a $1.8 million nest egg. And the youngest Millennials would need to save $1,000 a month for 48 years to accumulate $2.4 million.

How much should 20-somethings be saving?

How Much Should 20-Somethings Be Saving?

Time

The really bad news? All this math changes if you need more than $40,000 per year from your personal assets in today’s dollars and if inflation runs at 3%, the long-term historical average. In fact, that person would need at least $3 million in their nest egg, says Michael Lonier, a financial adviser with Lonier Financial Advisory in Osprey, Fla., who was quick to add: “Glad I’m not 35.”

Just how much?

The youngest of the Boomers, those born in 1964, would need $1.3 million earmarked for retirement. A Gen Xer born in 1975 would need about $1.6 million. The figure for a Millennial: $1.8 million.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at .

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If you tell the average twenty-two-year-old that the best time to start saving for retirement is yesterday, they may throw you an incredulous glance. “Are you kidding?” they may say, “I’m not due to retire for another forty years!”

The argument you may hear from Millennials and even some older members of Generation Z—those born between 1997 and 2012—is that they’re busy starting a family or paying down student loans and they simply don’t have the money to worry about retirement.

Our polling1 shows that many young adults are, in fact, worried about having enough savings for their future. For example, nearly one in four Millennials, born between 1981 and 1996, is concerned about having adequate funds, while 69% are uneasy about making that money last a lifetime.1

However, having time on your side is a tremendous advantage. Starting a retirement plan early may be the single easiest way to retire with an impressive nest egg.

The magic of time

Here’s a hypothetical scenario that puts things into perspective:

Say 22-year-old Bob makes $60,000 a year and retires at 65. He contributes 10% of his pre-tax salary into his 401(k) retirement account while his employer chips in 2%. Assuming he consistently makes that 12% monthly contribution of $600 and earns a hypothetical 5% rate of return, he’ll end up with $1,057,228 at retirement.

Sally, however, contributes $1,000 a month at the same hypothetical rate of return, but she doesn’t start until age 45. By the age of 65 she will have $407,458 in her retirement account—just 39% of what Bob has saved.

While many investors go in search of the magic double-digit stock gain, young investors shouldn’t overlook the power of consistent contributions to their retirement accounts—even if the contributions begin very small.

Hypothetical results for illustrative purposes only. Not representative of any particular investment.

Even small amounts make a big difference

A frequent complaint from young investors is that they simply don’t have the excess cash to invest. Using the example of Bob and Sally, let’s take a look at this misconception.

Say Bob complains that he can only afford to put away 4% a month due to his student loan and tight budget. Assuming the same rate of return over 43 years and a 2% employer match, he will have $528,614 at retirement—still significantly more than Sally even though his monthly and overall contributions were considerably less than hers.

Hypothetical results for illustrative purposes only. Not representative of any particular investment.

While that may not be enough for Bob to retire on, a study by the US Government Accountability Office showed that 29% of Americans over 55 have no retirement savings whatsoever2.

Now, of course, investment returns aren’t usually steady like our hypothetical example and typically will fluctuate. But with enough time on one’s side, even small contributions can make a big difference to an overall retirement portfolio.

Financial education that pays in the long run

Many young investors are also unaware about Modern Portfolio Theory, which looks at how an investor can build a portfolio to optimize expected return for given level of risk, or the importance of consistent contributions in a tax-free environment. A financial advisor can also help explain asset allocation and diversification to help smooth long-term returns through bear and bull markets.

But first and foremost, young investors should consider the tax-free environment of the 401(k) to put the power of time to work for them. Often it’s the most important investment they’ll make for their retirement.