Is rising student debt crushing the retirement plans of millennials? Here is what Merrill Edge found in a recent report.
The report focused on what Merrill Edge refers to as “mass-affluent” millennials, or those with between $50,000 and $250,000 in investable assets. Slightly over half (51%) of the survey respondents had no retirement savings in 2014, and only 35% of this 51% said they planned to save in 2015. One has to assume the numbers are even higher for millennials with too few investable assets to be included in the survey.
Do you believe in the debt fairy?
Debt is as least part of the reason. The survey noted that 65% of student debtors intend to pay off their student loans first and then save more for retirement. At the same time, 33% feel guilty about their low levels of investment in 2014 – reflecting difficulty finding the right balance between paying down debt and saving for the future.
Future students will likely have a larger burden than recent graduates will. Current undergraduate student loan rates are not terribly high at 4.66%, but thanks to recent legislation, the rate is now adjusted annually based on the financial markets, and these rates are highly likely to increase in the future. People with advanced degrees or with student loans outside the federal system are already dealing with significantly higher interest rates.
Contrast these findings with a different study from Ypulse that was recently released by Junior Achievement. In that study, 24% of millennials expect that their student loan balances will eventually be forgiven. The study does not delve into the reasons why some millennials believe this – perhaps debt repayment is just too horrible to contemplate, or maybe they believe in the debt fairy.
We hope that there is not much overlap between those two surveys. If you are a millennial who did not save anything for retirement and cited student debt as the reason, yet expect your student debt to disappear magically at some point in the future, you are in trouble.
A retirement paved with good intentions
The Merrill Edge report suggests that most millennials think more responsibly with respect to retirement, but just like all generations, they are having some difficulty acting on it. Financial goals topped the Merrill Edge survey for both 2014 goals achieved and 2015 goals set – with paying down debt and saving for retirement as the respective number one and number two goals achieved in 2014, and the order reversed for 2015.
However, there is some insightful information buried in the Merrill Edge survey. 73% of respondents think about their long-term finances as they pay their bills, but 53% do not consider long-term finances with their daily purchases. More than half of millennials do not see the connection between short-term purchasing decisions such as entertainment, dining out, etc. and their long-term finances.
This suggests too many millennials are not budgeting well and/or breaking their budget. The will appears to be there, but the corresponding fiscal discipline may not be for some millennials. Student loan debt may be aggravating this problem by drawing their entire focus, instead of looking at their debt as part of a broad financial plan.
We hope that more millennials will take a broader view and realize the connections between cumulative small savings and allocate more resources toward both their student debt and retirement plans. As with most generations, age and circumstances will likely force them in that direction – except for the group that is waiting for the debt fairy to arrive.
Winnie Sun is a
registered representative with, and securities offered through LPL Financial,
member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners,
a registered investment advisor and a separate entity from LPL Financial.