Millennials Could Face Late Retirement

The class of 2015 faces a retirement age as late as 75—two years later than what the Class of 2013 could expect—because of increasing student loan debt, rising rents and Millennials’ approach to money management, according to analysis by NerdWallet.

Compared with the current average retirement age of 62, that’s an extra 13 years spent working for today’s college graduates. And, with an average life expectancy of 84, they’ll spend only nine years in retirement.

Two major factors are dragging on the ability of Millennials to save early on, which will force them to work longer. The first is increasing student loan debt, which now averages $35,051, up more than $5,500 from 2012, when it was $29,400. This translates into larger monthly student loan payments, diverting money that could otherwise go into retirement accounts. The difference in monthly payment is more than $60 ($353 today versus $289 in 2012).

“The student loan crisis is not only affecting new graduates’ immediate financial situation, it’s making their retirement prospects dwindle,” says Kyle Ramsay, investing manager at NerdWallet. “Based on our findings, higher loan payments have the potential to reduce nest eggs by 32%. That’s nearly $700,000 in this scenario.”

Ramsay cites the powerful force of compound interest as an element in building a nest egg. A 23-year-old who invests $10,000 at a 6% return could see a sum that is twice that amount by the time he is 35 years old and 20 times that by the time he is 75, he says.

“Graduates are being forced to shell out more money,” says Ramsay, and that means less going into savings. “This puts them in a tough position because not only are they unable to save early, but they’re losing out on earning interest on those savings.” A delay in homeownership is also slowing Millennials’ ability to build assets, with buyers now purchasing a first home at the median age of 33.

When Millennials do find the money to save, they’re all too likely to keep their money on the sidelines. According to research from State Street, Millennials have an average of 40% of their saved money in cash, such as checking and savings accounts, and term deposits such as CDs.

Missing out on investment returns—even the semi-conservative 6% annual return used in NerdWallet’s analysis—for that portion of their portfolio could cost more than $300,000 (22% of the retirement savings they could have built with a better investment mix).

Millennials frequently report a distrust of investing and stocks, in part because they’ve lived through so much market turbulence, says Daniel Sheehan, a certified financial planner on NerdWallet’s Ask an Advisor platform. “On top of that, many have college loan debt and want to be sure they have funds to make the payments due each month while leading a life that they desire now,” Sheehan says.

But, the study emphasizes, Millennials do have one huge advantage: Time. Millennials have four to five decades to allow their money to grow with compound interest before they retire. To use that time wisely, they need to increase their savings rate from the median 6% where it now sits.

A 23-year-old who begins saving 10% today can shave five years off retirement age, amassing enough to leave work at 70. Saving 4% more per year amounts to $2,000 on a $50,000 salary; that’s about $165 a month. If a 23-year-old can save 15%, it will pay off with a 10-year difference, bringing retirement age down to 65. Someone who hits it out of the park and saves 20% or more could retire as early as age 62, today’s average retirement age.

Some quick facts on young graduates:

• Average student loan debt: $35,051
• Student loan repayment plan: 10 years
• Average yearly loan payment: $4,239

NerdWallet’s research is based on a 23-year-old new graduate earning the current median starting salary of $45,478 with $35,051 in student loan debt.

A link to NerdWallet’s calculations is on their website.