(Bloomberg Opinion) – The oft-cited goal of having a $1 million retirement nest egg should be retirement itself. Adjusted for inflationit would take nearly $1.9 billion to have the same purchasing power today as it did in 1999, when the oldest millennials had just turned 18. Granted, $1 million still sounds like a lot to many Americans, which may be why so many are nervous they won't make it to the double-comma club in retirement.
However, what worries me about my fellow millennials is how much they are relying on social media, YouTube, podcasts and cable news for free advice on how to build their retirement plans. All these platforms are loaded with unreliable information that can create unrealistic expectations.
Nearly 80% of millennials and Gen Z have turned to social media for financial advice, according to a Forbes Advisor Survey . One reason is that it is very difficult to create a simple, safe and affordable retirement plan. With no federal requirement for employers to offer a 401(k) plan to employees, let alone an employer match, it's up to individuals to figure out how to plan for retirement.
So I shuddered recently when I heard Longtime personal finance guru Dave Ramsey suggests that retirees can expect to handle 8% withdrawals each year from their retirement savings, which is apparently based on the assumption that the stock market will turn around. 12% on average .
Ramsey himself can emphasize that he is not an investment adviser and recommends that listeners of his show consult a professional. But that rarely stops people from taking advice from what they perceive to be a reliable source. And while it's tempting to hear that you can safely withdraw $80,000 a year on a $1 million portfolio, that adds a lot of risk to your retirement planning — especially if you retire in a down market.
Most financial professionals suggest a withdrawal rate closer to 4%, with adjustments based on market conditions and the cost of living. This means that someone with $1 million saved for retirement can safely withdraw $40,000 a year without outliving their money. This is based on a paper several decades old Retirement Savings: Choosing a Withdrawal Rate That's Sustainable, better known as the study of the Trinity. But many advisors and brokerage firms conduct their own stress tests to determine a safe rate.
It's a good rule of thumb, although retirees will need to adjust their withdrawal rates based on current market conditions when they retire. And risk appetite changes. Some experts would agree with Ramsey that 4% is unnecessarily conservative, while others would push to set a target for nest eggs based on a lower early withdrawal rate, such as 3%, to protect against a bear market.
Fortunately, recent legislation should at least encourage people to get started, especially younger workers. Starting from 2025, the opening of Secure 2.0 Act will require newly created 401(k) plans to automatically enroll employees, with a minimum contribution of 3% of their annual salary. Automatic adjustments will increase contributions each year by 1% until they reach a threshold of 10% or 15%.
Increasing withdrawal plans can help Gen Z build sustainable retirement savings. But the new rules don't apply to existing plans, meaning many workers won't benefit from the automatic increase in contributions.
Auto-enrolment and increased savings may sound paternalistic, and in some ways they are. But in the absence of proper financial education and initiative on the part of workers, many people would otherwise put off starting a 401(k) and increasing contributions.
That said, a requirement to contribute to a retirement plan does not address the widespread lack of understanding of how to properly invest those funds. Putting contributions into a fixed-date fund is a more or less suitable strategy, though not for everyone. Millennials and Gen Z would be better off talking to a professional to evaluate their strategy rather than turning to the Internet, which is good for recommendations on which water bottle to buy, but not great for free investment advice.
I don't want to be a complete punisher. Many millennials are doing well in the face of conflicting advice. According to a Northwestern 2024 mutual study. That means the average 34-year-old would need to invest roughly $9,000 a year, assuming an 8% market return, to get close to their goal of $1.65 million. This is achievable, although the ever-increasing costs of housing, child care, college tuition, and caring for aging parents can make it difficult.
The bottom line is that anyone funding their retirement accounts, regardless of the amount, would do well to overestimate how much they'll need and plan for a conservative withdrawal rate, at least in the early years of retirement. Designing a retirement strategy based on free advice is a risky plan.
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To contact the author of this story:
Erin Lowry at (email protected)