I am surprised so few of the millennial generation are preparing for retirement by participating in tax deferred retirement plans. My generation was introduced to the miracle of compounding returns when the retirement system was revamped in 1976. Over 40 years later $1000 invested per year compounding at 8% tax deferred is now worth $349,726. My employers all encouraged participation in tax deferred retirement plans by offering employer matches. Sometimes that match was 1:1 up to 3%. Even more amazing has been the introduction of the Roth IRA. You don’t get the same tax benefits when you contribute, but when you take withdrawals they are taxed at capital gains rates. Most of my peers bought into the retirement system and saved.
Millennials Are Not Using The Tax Deferral
This is not true for the millennial group who are about the same age as I was when I began contributing to my 401k and IRA plans. According to Maurie Backman, writing for The Motley Fool on March 9, 2018.
Very few the millennials are investing anything in a retirement plan:
“ Apparently, younger workers aren’t getting the memo. In fact, 66% of millennials have no money saved for their golden years, according to new data from the National Institute on Retirement Security. But here’s the kicker: It’s estimated that two-thirds of millennials work for a company that sponsors a retirement plan, yet only about half that many younger employees opt to participate. All told, only 5% of millennials are saving appropriately for retirement, which means the bulk of younger workers risk coming up short once their careers draw to a close.”
This Correlates To Low Financial Literacy
Interestingly, this low participation also correlates with a pretty disturbing analysis by The Wall Street Journal in their Daily Shot at financial literacy among high school students. This chart shows that only 5 states mandate education on financial matters for high school students and under 10% of the high school population has any education about financial matters. Maybe this explains how the millennials missed the miracle of compounding tax deferred returns:
There is also an implicit threat to the whole capitalistic system. If you don’t begin with some sort of financial literacy at an early age you also do not begin to understand how the capitalist system diverges from socialist and central economies. When you are invested in the capitalist system you have an incentive to promote it by protecting its fundamental principles. I fear that the central authority is crowding out an informed and financially literate population.
Student loans are a great example. The government intervened in what had been a longstanding local bank product. The result has been a disaster because students without an ability to pay have been underwritten and encouraged to pursue an education that is increasingly irrelevant to job creation. In the private system the money would not have been chasing marginal customers.