Despite Wealth Gains, Millennials Likely to Face Greater Retirement Uncertainty

What You Need to Know

For early millennails in the top fifth of the lifetime earnings distribution, median age-70 income will be 51% higher than pre-boomers.
However, because of earnings inequality, 38% of millennials born in the 1980s will have inadequate age-70 income, compared with 28% of pre-boomers.
Many millennials will desperately need the help of financial advisors as they seek to convert accumulated, tax-advantaged assets into sustainable income streams.

Richard Johnson is a senior fellow in the Income and Benefits Policy Center at the Urban Institute, where he directs the organization’s program on retirement policy.

An expert on financial security at older ages, he has authored or co-authored more than 200 journal articles, book chapters, research reports and policy briefs. His latest project, written in collaboration with the Urban Institute’s Karen Smith, seeks to answer a straightforward but significant question: How might millennials fare in retirement?

In a word, Johnson says, the financial outlook for future generations of retirees is uncertain. To begin with, the scheduled increase in Social Security’s full retirement age to 67 will reduce benefits for future retirees, and the program’s longstanding financing gap could lead to further cuts.

Other ominous signs, Johnson says, include the erosion of traditional defined benefit pensions, stagnating earnings among lower- and moderate-income men, growing indebtedness and rising out-of-pocket costs for medical care and long-term services.

On the other hand, the Urban Institute’s analysis identifies trends that are more promising, such as the increase in women’s earnings and the growth in employment at older ages.

As Johnson tells ThinkAdvisor, given their relatively long time horizon ahead of retirement, millennials have a tremendous opportunity to improve their outlook, for example by committing to higher levels of saving and making smart choices about investing, ideally in collaboration with a skilled financial advisor.

A Wealthier Generation Overall

Johnson says the analysis projects per capita family income at age 70 to increase over time, such that average age-70 income is projected to reach $80,300 for early millennials in 2021 inflation-adjusted dollars. This figure is 35% higher than the $59,400 average for pre-boomers born between 1937 and 1945 and 23% higher than the $65,400 for late boomers, defined here as those born between 1955 and 1964.

Projected age-70 incomes are higher for men, non-Hispanic white adults, married adults and college graduates than they are for women, people of color, single adults and people who did not attend college. The analysis further projects that many of these differentials will narrow over the coming decades as projected retirement incomes grow rapidly for people of color and women.

Johnson agrees that these figures should be of interest to financial advisor professionals, as the projection of significantly increased retirement wealth at the population level clearly indicates the millennial generation will include a substantial number of potential high-net-worth clients. What’s more, Johnson says, much of this wealth will be held in the employer-sponsored retirement plan system, and more specifically in defined contribution style plans as opposed to pensions.

As such, Johnson says, many millennials will desperately need the help of financial advisors as they seek to convert accumulated, tax-advantaged assets into sustainable income streams for a potentially lengthy retirement.

Concerns Over Inequality

According to the Urban Institute, projected age-70 income differentials by lifetime earnings will increase over time, which Johnson calls “troubling.” Specifically, for people in the top fifth of the lifetime earnings distribution, median age-70 income will be 51% higher among early millennials than among pre-boomers.

Median age-70 income will increase only 22%, however, for people in the middle fifth of the lifetime earnings distribution and only 31% for people in the bottom fifth, the analysis projects.

These differentials largely reflect ongoing growth in earnings inequality, Johnson explains, as earnings have increased more rapidly near the top of the earnings distribution than in the middle or near the bottom.