Millennials can potentially have a comfortable standing for retirement. Many may believe they will never accumulate a million dollars in their lifetime because they face significant financial burdens, particularly as architectural students and emerging professionals. However, millennials can start saving early, gradually increase contributions to their plans, and achieve a comfortable retirement.
Student loan payments are taking up a growing chunk of post-graduate income, explaining why the primary concern for millennials is the heavy burden of student debt. According to the Student Loan Hero website, the average Class of 2016 college graduate has $37,172 in student loan debt. This translates into larger monthly student loan payments, diverting money that could otherwise go into retirement accounts (see A Look at the Shocking Student Loan Debt Statistics for 2016).
The average debt of an architectural student is higher still. Not only is average debt rising, but more students are taking out loans to finance secondary education. According to the Wall Street Journal, 71% of bachelor’s degree recipients will graduate with a student loan as compared with less than half two decades ago ( see Congratulations, Class of 2015. You’re the Most Indebted Ever (For Now)).
Renting vs. Buying
Aside from increased student loan debt, how else do millennial architects differ from previous generations? Millennials are renting more often, rather than taking on home ownership. According to the Federal Reserve Bank of NY, 56% of renters said they would choose to rent because they do not have enough money saved or have too much debt (see Why Aren’t More Renters Becoming Homeowners?).
According to Zillow’s first quarter market report, average rental rates are up 11% since 2012, and the cost of living is rising (see Did Anyone Tell Landlords That Slow & Steady Wins the Race?). Because tenants are spending more on rent, less of their earnings are going into savings. If they’re not saving early, they could be missing out on thousands of dollars of accumulation and the benefits of compounded interest.
Whether young architects decide to work for a large firm or launch their own, the resulting impact of debt remains the same. Most new business owners rely heavily on personal assets and loans to get their practices started. According to the Kauffman Foundation, the effects of student debt could be significant, even among the startups that are heavily funded by external capital (see 3 Ways Student Debt Can Affect Millennial Entrepreneurs).
Start Saving Now
People often use the phrase “time is money.” In this case, the longer you wait to start saving for retirement, the more you miss out on the benefits of the incredible power of compound interest. For example, suppose you are interning with a firm and have a $30,000 salary. You receive 4% annual raises, and plan to retire in 30 years. You put 4% of your salary into a retirement plan each year and earn an 8% annual return. If you start investing today, you’d have $220,944 when you retire. If you wait 5 years before investing, you’d have $164,878. In this hypothetical case, waiting five years would cost you $56,066.
One can see that someone who starts saving today puts away about $6,500 more than if they waited 5 years. By investing money for a longer period of time, there is a significantly higher ending balance because of compounding interest.
A key message for millennial architects is to pay yourself first. It’s important to put money away into a retirement savings account right when a paycheck is received, and to increase yearly contributions with each salary increase. Millennials may be constrained by student debt and demanding monthly expenses, but with small steps, they can be making their way towards a more comfortable financial position for retirement.
GE 118322 (9/16) (Exp. 9/18)