Many Americans know it’s important to begin saving early for retirement. But they may not appreciate just how early.
Americans should start saving no later than 25 years old, saving $100 a week from then on to generate savings of more than $1.1 million by age 65, according to a report from the Milken Institute.
While many challenges can prevent Americans from beginning to save for retirement at the optimal age, the Milken Institute offers several ways individuals and society can help overcome such obstacles.
“We decided to put together some of the best information highlighting the majority of the factors that impact financial stability and financial security over time,” Cheryl Evans, director in the Milken Institute Center for Financial Markets, said of the study. “Everyone wants to be financially secure. Everyone wants to live the life that they want. So this is an issue that touches everyone at every level, cuts across demographics, and that’s why it’s so important.”
The study drew on meetings with financial and fintech experts including the Milken 2022 Global Conference. It found that around 25% of Americans lack retirement savings, and only 24% of workers feel “very confident that they’ll be able to retire comfortably.” Meanwhile, around half of Americans don’t have access to an employer-sponsored retirement plan.
The study also highlights several obstacles that stand between Americans and a strong retirement plan. They range from steep healthcare costs and social inequality to crushing housing costs. But Evans said psychological biases and student debt in particular yield some of the toughest challenges for younger people looking to start saving for retirement.
For instance, the study spotlighted a “temporal bias” in which Americans struggle to identify with their future selves and consequently fail to begin saving for retirement when they should.
“Temporal discounters tend to view their future selves as different from their present selves and cannot bring themselves to take actions that may discount present rewards in favor of benefiting those other future selves,” the Milken study said.
Student debt, meanwhile, places a significant financial burden on workers and delays them from beginning a retirement plan. College tuition and fees were nearly 1,500% higher in 2022 than in 1977, according to the report. Evans pointed out that student loan defaults show up on credit reports, which puts borrowers at risk of a lower rating, making it more expensive to borrow in the future.
“That’s something that people are well aware of, right? Like, you have to pay this no matter what. You have to pay this first,” Evans said. “So I think the notion is embedded: ‘I’ve got these loans, I’ve got to make these payments.'”
The study offered other ways Americans can overcome the barriers keeping them from retirement savings — at both the individual and systemic levels.
At an individual level, the report places a pronounced emphasis on countering “temporal bias” by getting in touch with their “future selves.” According to the paper, some experts suggest Americans think about their current and future selves as two separate people who need help. Evans said that might mean sacrificing current needs for future ones.
“There’s the young you and the old you,” Evans said. “You want to take care of the old you, not the you now… Sometimes thinking in that way can be useful.”
The paper also recommends American practice visualization techniques to reach their financial and retirement goals. James D. Loftin, CEO of Loftin Wealth Advisors LLC in Georgia, says he practices visualization himself and recommends young folks do the same.
“You can turn your dreams into reality by just visualizing and then actualizing as if it’s an art,” said Loftin, who is not associated with the study. “It’s like a skill set. And once you are taught that, it’ll unlock the giant within you.”
The report also emphasizes the importance of financial education, recommending that investors take advantage of the wide variety of financial education resources available to them, such as those at various banks and financial services firms. For instance, Standard Bank’s “Money Tips for Better Financial Education” covers saving and investing, according to the report.
In particular, the Milken Institute also emphasized that teaching Americans the power of compound interest could make them more likely to start saving at a younger age. As the study notes, compound interest refers to “when interest earned on investment is reinvested along with the individual investment.” As money is added, the account sees exponential growth over time.
For instance, according to the government’s compound interest calculator, with an initial investment of $30 and a monthly contribution of $50, investors could make over $54,000 in 35 years, assuming a 5% interest rate with 3% variance.
“We really want to highlight the power of compounding,” Evans said. “So I think if people could sort of really get that power of compounding money and how much a small amount can make a difference.”
Matthew Benson, a financial planner at Sonmore Financial, added that financial education could help Americans better navigate their student loans.
“I think most people would not decide to take out $100,000 in student loan debt to make $40,000 a year in a job if they had a mentor they could talk through that problem with,” he said. “I think really the root of the solution starts with financial literacy and training 18- and 19-year-old kids to be better financial decision-makers.”
On a broader level, the paper highlights the ways financial tech products offer Americans further opportunities to get ahead on saving for retirement. For instance, according to the report, they can use robo-advisers from firms like Vanguard and Betterment. The advisers give financial advice in real time and process client transactions.
The report also spotlighted AI-assisted visualization. For instance, T. Rowe Price’s “Visualize Retirement” product offers consumers an online platform, program guides, and e-workbooks that allows them to map out their future. Evans said such visualization tools can help Americans incentivize Americans to prepare for retirement.
“How would I like my life to look when I’m older? Do I travel? Do I not? That’s sort of visualization of those platforms that provide that AI-assisted visualization that can help people to overcome some of those biases.”
The Milken Institute report also expressed support for government-facilitated retirement plans. It spotlighted the Secure 2.0 Act, which was signed into law in 2022 and could help millions of Americans save for retirement. As the Milken report notes, the bill would require businesses to auto-enroll employees into retirement plans unless they choose to opt out. The report also espoused support for state-facilitated retirement plans. The majority of such plans, which have been adopted by 19 states, would require automatic enrollment in individual retirement arrangements, or IRAs.
“It’s really helping the people who don’t have access to a plan who have a physically demanding job,” said Evans. “Suddenly they can be younger people of any age, and they suddenly can have access to the plan in those states. So, it’s really helpful.”
