To the youngest working generation, retirement seems like a distant chapter in their lives. And it’s understandable, since the majority of the Millennial generation (individuals who were born between 1981 and 1996) have just recently become part of the labor force. By 2025, it is estimated that Millennials will make up almost 75 per cent of the Australian workforce. 

The road to retirement can be challenging for many. But it is particularly difficult for Millennials,  who face economic challenges and financial headwinds that are different from older generations. 

Below are a number of reasons why Millennials are struggling to save for retirement.

Generational challenges 

Millennials are having a harder time saving for their retirement partly because they start work and earn later in life compared with the previous generations, according to social researcher Mark McCrindle.  

Individuals who are part of this generation are earning at a later age than their parents because they are studying for a longer period, Mr McCrindle explained. He added that the majority of Millennials choose to go to university and accumulate student debt through HECS (Higher Education Contribution Scheme) or lifestyle debts (such as credit card debts). 

By starting their contributions to their superannuation funds at a later age, they have a smaller super account balance upon reaching the age when they can access their supers, compared with the generations before them. 

Due to the advancements in the medical field, Millennials also have a longer lifespan compared with prior generations and therefore will have a longer retirement period to fund. This means that Millennials will have to be more strategic with their retirement plan due to their higher savings goals.

There is also a risk that Millennials will outlive their inadequate retirement funds. According to the Australian Bureau of Statistics, life expectancy in Australia is among the highest in the world, and on record. 

Rent and debt  

Australia’s retirement incomes system has been built on the assumption that the majority of retirees will be able to purchase homes outright. Home ownership gives retirees big benefits:  they will not pay rent and they will be protected by the increasing housing costs. 

However, this ideal retirement scenario may not be achieved by most Millennials as home ownership rates among young adults have fallen dramatically, partly due to the rampant property price growth and worsening housing affordability.  

And this decline is seen to continue in the coming years. Based on present trends, think tank Grattan Institute estimates that the share of retirees who own their homes will fall from the current 76 per cent to 74 per cent in 2026, to 70 per cent by 2036, 64 per cent by 2046 and 57 per cent by 2056. 

With more time spent studying, Millennials are also due to have more debt. This results in them living at their home renting as they are unable to finance a house. The most recent Housing Income and Labour Dynamics (HILDA) Survey data showed that more than 50 per cent of young adults are still living with their parents. 

Due to these factors, Millennials are finding it difficult to maximise the potential of their retirement plans. It is also likely that most young adults now will become lifelong renters. They will also be at risk of poverty and financial stress. Because of this, they will need extra strategising to become financially independent upon retiring.  

Unstable careers and insufficient earnings 

The weak growth in wages is adding financial pressure for Millennials in saving for retirement. Financial experts say the slowdown in wage growth over the years along with the increasing cost of products and services has prevented Millennials from putting away sufficient money to attain financial independence during their retirement. 

Career choices are also affecting Millennials’ financial futures. A recent research by McCrindle showed that young adults are now choosing more flexible but less stable working arrangements. It was found that one in five Millennials who is within the working age range had worked in freelance, contractual or casual roles. Almost half of Millennials who were surveyed also indicated their preference for these non-traditional working arrangements, or working in the so-called gig economy. 

While these working conditions may offer opportunities of higher income, substantial flexibility and a more sustainable work/life balance, it has a few downsides for Millennials’ retirement savings.

Due to the unstable nature of the gig economy, Millennials are seen to be earning less. While their pre-tax wages are bigger due to a higher hourly rate, they are working for fewer hours. This not only affects their income now but also their retirement planning. 

Retirement planning not a priority

With numerous milestones yet to come and a lifetime of opportunities still ahead of them, it can be a challenge for Millennials to seriously plan for their retirement. 

In a report by the Financial Services Council, Millennials are three times less interested in the status of their personal superannuation than those of previous generations.  

In a broader scope, younger people were found to be generally less interested and engaged with their financial affairs. Experts say most Millennials are putting their future financial independence at risk because they don’t fully understand the role of superannuation. They rarely read the information that was given by their fund or make changes to their fund, and the majority of them do not give voluntary contributions.  

Overall, the results show that young adults significantly lack interest in, and engagement and concern with, issues related to their retirement planning.

Tips for Millennials who are saving

If you are one of the Millennials who are experiencing these challenges and issues while saving for retirement, below are some basic steps you can take to ensure you will have enough money when you retire: 

• Create a budget. Live within your means and be smart about where you spend your money. 
• Use a retirement calculator to be aware of how much super you’ll have at retirement. You may also seek the help of financial advisers how to plan properly for your retirement, pay off debt strategically and boost your super balance. Study how your super is invested and track how much you have saved. 
• Make extra contributions at the start of your career. Any amount you contribute (on top of the employer’s mandatory 9.5 per cent per year) will accumulate over the years from the compound interest. Consider a salary-sacrifice arrangement with your employer or  make personal contributions yourself, and claim the same tax deduction. You may also choose to transfer money automatically into a separate savings account so you can avoid dipping into funds allotted for your superannuation or investments.
• If you are a freelancer or self-employed, have the initiative to earmark at least 9.5 per cent of your earnings into super. Be responsible in managing your own tax and superannuation. Avoid being unemployed for a long period of time, as breaks can have negative implications on your super. 
• Invest outside your super fund. Consult with a financial adviser to learn more about other ways you can grow your money. You can look into investing in stocks, shares or even real estate. 
• Consolidate your super fund throughout your career. Usually employers offer their default super fund to new employees. When you switch super accounts from job-to-job,  you will end up paying multiple sets of fees. Additionally, super funds differ in terms of fees, performance and customer service. An employer’s default fund may not be the right fit for you. Exercise your right to choose your own super fund. 

Conclusion 

The youngest working generation faces unique challenges in saving for retirement. But Millennials have one advantage: time is on your side. By taking action now, you can boost your retirement fund to attain financial freedom post-work. Making small changes now can result in a big difference by the time you retire. 

Are you planning for your retirement? Explore nestegg to learn more.