Much ink has been spilled over the wealth gap between baby boomers and millennials, with the latter often seen as losing out in the economic race. However, a recent study from Vanguard has flipped the script, suggesting that millennials and Gen Xers may enjoy a more comfortable retirement than their boomer counterparts.

According to the study, Americans born in the 1980s and early ’90s exhibit a brighter retirement outlook than boomers. The research by Vanguard measured retirement readiness in terms of the sustainable replication of pre-retirement income, incorporating retirement plans, Social Security, and other resources.

Closing the Gap

Vanguard’s findings indicate that median-income “early millennials” (aged 37 to 41) are on track to replace 58% of their pre-retirement earnings. In contrast, median-income “late boomers” (aged 61 to 65) are projected to regenerate only 50%. While both fall short of the ideal 83% replacement, millennials are in a better position to meet this goal than boomers.

One article commenter pointed out, “Even older millennials were probably just barely too young to get a pension, unless they went into a handful of specific fields. So a lot of them have had to actually make plans for retirement. “

Surprisingly, the study attributes this reversal to policy innovations and better investment decisions made by millennials. Over the past two decades, retirement plan features like auto-enrollment, auto-escalation, and target date funds have become commonplace in 401(k)s, significantly benefiting younger generations.

“We’ve seen a number of policy innovations that have expanded access to retirement plans,” noted Fiona Greig, Ph.D., one of the study’s co-authors. These innovations have made it easier for millennials to join retirement plans, increase savings rates, and invest in diversified portfolios.

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The Power of Automation

The study underscores the impact of three key innovations. Auto-enrollment automatically ensures workers are signed up for retirement plans, with the option to opt-out. Auto-escalation increases workers’ contributions automatically as their incomes rise. Target date funds adjust asset allocations as retirement approaches, functioning akin to a robo-advisor.

These automatic features have significantly boosted participation rates. Vanguard’s research revealed that auto-enrollment raised plan participation rates to an impressive 91%, a stark contrast to the 28% under voluntary enrollment.

While millennials and Gen Xers seem better prepared for retirement, the advantage is not universal. The study notes that lower-income households across generations, making less than $22,000 a year, face challenges in retirement preparedness due to limited access to employer retirement plans.

For these individuals, homeownership might be a crucial factor. Vanguard suggests tapping into home equity through options like reverse mortgages or downsizing as a powerful, albeit imperfect, lever to bridge retirement gaps. However, financial advisors remain cautious, viewing these options more as a safety net than a sustainable strategy.

People in the comments are chiming in with their perspectives: “We will sell the house, get an apartment then travel the world. Don’t need a house sitter, landscaper, snow shoveller.“

Another said: “Keep in mind that the later generations have had to deal with massive stock market crashes, huge housing costs, and employers don’t do retirement pensions anymore.“

There are many interesting stories there, including this one: “This isn’t accounting for pensions which Boomers are more likely to have.  Sure, they’re not going to need a million in the bank when they have a guaranteed pension payment every month.  I know someone who, in his words, gets paid 10K a month just for waking up.”

Others are skeptical: “IRA limits were $2000 or under, from 1974 til 2002. And very few 401k were offered. Can’t get Gen X or z to save that much, so I doubt this article is true.”

And there are those who see these types of articles as potentially damaging: “First the media fosters racial discontent now they’re focusing in on generational discontent How lovely and appropriate to our citizen psyche.”

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Shifting Perspectives on Homeownership

As millennials grapple with tight housing markets, some financial advisors encourage considering homeownership as part of a diversified retirement plan alongside traditional savings. 

However, others argue that millennials building wealth through financial assets rather than housing assets isn’t necessarily bad, challenging the long-standing belief in the financial benefits of homeownership.

In conclusion, the retirement landscape is evolving, with millennials and Gen Xers leveraging innovative policies to bridge the gap and defy traditional expectations. As these generations continue to make strides in retirement preparedness, financial advisors play a crucial role in guiding them toward a secure and prosperous future.

What do you think? Which generation are you a part of? Are you familiar with millennials and GenXers who are already preparing for retirement?

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