Many Americans know it’s important to start saving for retirement early. But they may not know how early it is.
According to the Milken Institute report, Americans should start saving no later than age 25 and save $100 a week from then on to achieve savings of more than $1.1 million by age 65 .
While many challenges can prevent Americans from starting saving for retirement at optimal ages, the Milken Institute offers several ways individuals and society can help overcome such obstacles.
“We decided to put together some of the best information that highlights most of the factors that impact financial stability and financial security over time,” Cheryl Evans, director at the Milken Institute Center for Financial Markets, said of the study. “Everyone wants to be financially secure. Everyone wants to live the life they want. So this is an issue that affects everyone at all levels, cuts across all population groups and is therefore so important.”
The study was based on meetings with finance and fintech experts, including the Milken 2022 Global Conference. It found that around 25% of Americans have no retirement savings and only 24% of workers are “very confident about their ability to retire comfortably.” Meanwhile, about half of Americans do not have access to an employer-sponsored retirement plan.
The study also highlights several barriers that stand in the way of Americans and sound retirement planning. They range from high healthcare costs and social inequality to overwhelming housing costs. However, Evans said psychological biases, and student debt in particular, pose some of the biggest challenges for younger people looking to start saving for retirement.
(Photo: Getty Creative)
For example, the study highlighted a “temporal bias” in which Americans have difficulty identifying with their future selves and therefore do not start saving for retirement in a timely manner.
“Temporal discounters tend to view their future selves as different from their present selves and cannot bring themselves to take actions that might discount present rewards in favor of the benefit of these other future selves,” the Milken study says.
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Student debt represents a significant financial burden for employees and delays the start of retirement planning. According to the report, tuition and fees in 2022 were nearly 1,500% higher than in 1977. Evans noted that student loan defaults show up on credit reports, putting borrowers at risk of receiving a lower credit rating, which increases borrowing in the future more expensive.
Read more: Worried about when student loan repayment will resume? These programs could help
“People are well aware of that, right? You definitely have to pay for it. You have to pay for that first,” Evans said. “I think the idea is ingrained: ‘I have these loans, I have to make these payments.'”
The study showed Americans other ways to overcome the hurdles that keep them from saving for retirement – at both the individual and systemic levels.
At the individual level, the report places particular emphasis on counteracting “temporal bias” by getting in touch with your “future self.” According to the paper, some experts suggest that Americans view their present and future selves as two separate people in need of help. Evans said that could mean sacrificing current needs for future ones.
“There’s the young you and the old you,” Evans said. “You want to take care of your old self, not your current self… Sometimes it can be useful to think this way.”
The paper also recommends American practice visualization techniques to achieve their financial and retirement goals. James D. Loftin, CEO of Loftin Wealth Advisors LLC in Georgia, says he practices visualization himself and recommends young people do the same.
“You can turn your dreams into reality by simply visualizing them and then realizing them as if it were an art,” said Loftin, who is not involved in the study. “It’s like a skill set. And once you learn that, it will unleash the giant in you.”
Keegan-Michael Key and Chris Tucker attend the 2023 Milken Institute Global Conference at the Beverly Hilton in Beverly Hills, California on May 3, 2023 (Photo by Jerod Harris/Getty Images)
The report also emphasizes the importance of financial education and recommends that investors take advantage of the diverse financial education resources available to them, such as various banks and financial services companies. For example, Standard Bank’s “Money Tips for Better Financial Education” covers saving and investing, according to the report.
Read more: Money Market Account vs. CD: Which is Best for Savings?
Notably, the Milken Institute also highlighted that communicating the power of compound interest could increase the likelihood that Americans will start saving at a younger age. As the study notes, compound interest refers to “when the interest earned on an investment is reinvested along with the individual investment.” As money is added, the account grows exponentially over time.
For example, according to the government’s compound interest calculator, investors with an initial investment of $30 and a monthly contribution of $50 could earn over $54,000 in 35 years, assuming a 5% interest rate and a 3% variance .
“We really want to emphasize the power of compounding,” Evans said. “So I think if people could really get the power to compound money and see how much of a difference a small amount can make.”
Matthew Benson, a financial planner at Sonmore Financial, added that financial education could help Americans better manage their student loans.
(Photo: Getty Creative)
“I think most people wouldn’t choose to take out $100,000 in student loans to make $40,000 a year at a job if they had a mentor to discuss this issue with,” said he. “I think the root of the solution really lies in financial education and training 18- and 19-year-old kids to be better financial decision makers.”
On a broader level, the paper sheds light on the ways financial technology products are providing Americans with additional opportunities to get ahead in saving for retirement. For example, they can use robo-advisors from companies like Vanguard and Betterment, according to the report. The advisors provide real-time financial advice and process customer transactions.
The report also highlighted AI-powered visualization. For example, T. Rowe Price’s Visualize Retirement product provides consumers with an online platform, program guides and e-workbooks to help them plan their future. Evans said such visualization tools could help incentivize Americans to prepare for retirement.
“What do I want my life to be like when I’m older?” Am I traveling? Am I not traveling? This is kind of a visualization of these platforms providing this AI-powered visualization that can help people overcome some of these biases.”
The Milken Institute report also expressed support for government-sponsored retirement plans. It highlighted the Secure 2.0 Act, which took effect in 2022 and could help millions of Americans save for retirement. As Milken’s report notes, the bill would require companies to automatically enroll their employees in retirement plans unless they elect to opt out. The report also advocated supporting government-sponsored retirement plans. Most of these plans, adopted by 19 states, would require automatic enrollment in Individual Retirement Arrangements (IRAs).
“It really helps people who don’t have access to a plan and have a physically demanding job,” Evans said. “Suddenly it can be younger people of all ages, and they can suddenly have access to the plan in those states. So that’s really helpful.”
Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.
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