Over the last several years, the landscape of the American job market has undergone a significant transformation, thanks to the fallout from the Great Recession. Stiffer competition and shrinking wages have also lead to changes in worker attitudes, perhaps most noticeably among twenty and thirty-somethings.
Millennials take a very different approach to their careers compared to previous generations and a general sense of economic instability is one of the root causes. As a result, they’re changing employers at a much faster rate than older workers. According to the most recent statistics from the Department of Labor, the median job tenure for 55 to 64 year olds was 10.4 years. Among 25 to 34 year olds, it was just three.
Aside from dealing with doubts about job security, company-hopping young adults are also motivated by a need for fulfillment and meaningful employment. Whereas older Gen Xers and baby boomers tended to focus on following an upward career trajectory, today’s job seekers value work that interests and appeals to them over a fat paycheck. Unfortunately, a commitment to following their passions has many millennials seeing their retirement savings shrink.
The cost of changing jobs too often
For millennials who are launching their careers right out of college, the need to start socking away money for retirement is evident. A 2014 report from the Transamerica Center for Retirement Studies found that 81 percent of millennials don’t expect Social Security to be a viable source of income once they leave the 9 to 5 behind for good. The average age at which they start saving for their golden years is 22, compared to 35 for boomers.
Even though they’re getting started earlier, younger savers aren’t necessarily making as much progress as they should be. Part of the reason is that millennials’ shorter average job tenure means they’re leaving their employers before the money in their 401k or pension has had time to vest.
How much are millennials leaving on the table?
A Fidelity report prepared on behalf of CNNMoney found that among job hoppers, one in four left retirement money on the table when they handed in their resignation letters. The average amount of cash they missed out on totaled just over $1,700. Younger workers were the hardest hit, with millennials leaving 24 percent of their savings behind on average, compared to just 11 percent for baby boomers.
When you consider that the current vesting schedule for defined benefit plans, including 401(k)s, requires workers to be on the job for a minimum of three to six years before their account is fully vested it’s easy to see why millennials are coming up short. Not only are they losing out on a substantial percentage of savings by leaving early, they’re also forfeiting any gains they could have earned by sticking it out until their benefits were fully vested and then rolling it over into another qualified plan.
Consider the $1,700 average cited in the Fidelity report, for example. Someone who changes jobs four times between the ages of 22 and 34 would feel the loss to the tune of $6,800. That may not seem like much but over the course of a 30- to 40-year career, it could add up to roughly $40,000 to $50,000 in unrealized returns.
Higher unemployment also tied to delayed saving
The recently released October jobs report saw the national unemployment rate drop to 5.9 percent. While that’s an encouraging sign, it may not paint an accurate picture of the job outlook for millennials. Generation Opportunity, a non-partisan youth advocacy organization also released its monthly jobs report and the numbers don’t look promising. Among 18 to 29 year olds, the effective unemployment rate was 14.9 percent, which reflects those number of younger workers who’ve given up looking for a job altogether.
For those 20 and 30-somethings who either can’t find a job or are only working part-time, saving for retirement through an employer’s plan simply isn’t an option. Competition for full-time jobs, even at entry-level positions, is extremely fierce these days and millennials can’t count on their youthful energy or education working in their favor. The longer young adults are out of the job market or working at jobs that don’t offer retirement plans, the longer they’re forced to put off saving for their future.
Ways to save
Opening an IRA is a good choice for millennials who want to save for retirement but can’t because an employer’s plan isn’t an option. As of 2014, you could put up to $5,500 in a traditional or Roth IRA. While that’s much lower than the $17,500 you can sock away in a 401(k) or similar plan, it’s a step in the right direction. These accounts do offer some tax benefits, since traditional IRA contributions are usually deductible and Roth withdrawals are generally tax-free.
Millennials who are facing unemployment or under-employment may find coming up with an extra $5,500 a stretch but that doesn’t mean they can’t save anything at all. Opening a high-interest online savings account or investing in a CD usually doesn’t require a huge amount of cash and you’ll earn interest on every penny you put in.
When you do finally land a job with benefits, you’ll have already developed a savings habit, which should make it easier to ramp up your retirement planning efforts.