NerdWallet recently published a report stating that new college graduates wouldn’t be able to retire until age 75. The three factors pushing back retirements are student loan debt, high housing costs, and millennials holding onto cash instead of investing it.
There are a lot of problems with this report though, and perhaps the biggest is that it’s based on a lot of averages, and you should already know the dangers of average. Let’s break down the report though, and see if everything is really as bleak as it sounds.
The first place to start is with the notion that college graduates won’t be able to retire until 75. If college graduates have to work for 53 years before they can retire, what about folks who never go to college? We’ll get back to this in a bit; the average salary for a high school graduate is $27,915 a year, versus $45,478 for a college graduate.
NerdWallet assumes when you retire you’ll need 80% of your final year’s income to live comfortably. We already know there shouldn’t be a relationship between how much you make, and how much money you need to retire, but because of their methodology, we’ll continue down this path. They don’t specifically break down how a salary of $45,478 is spent, so we’ll assume 6% goes into a 401(k) before taxes, leaving $42,749. After taxes, there’s $38,453, with $22,109 left over after paying rent of $1,362 a month. After student loan payments, the graduate has $18,576 left over each year for living expenses.
If a new graduate needs $1,548 a month to pay for transportation, food, clothes, and other expenses, no wonder they can’t retire until age 75!
The study authors assume a college graduate would earn $211,513 at age 75, and collect $33,482 a year in Social Security. 80% of $211,513 is $169,210, the amount they think a retiree will need their first year of retirement, $135,728 of which would come from investments like a 401(k).
Just a quick note, NerdWallet’s numbers don’t exactly add up. They state a 50% 401(k) match, up to 6%, which typically means if you invest 6%, your company will give you another 3%. In their projections though they assume a total of 6% is invested, not 9%. Additionally, they incorrectly calculate that if you saved 6% annually you’d have $1,189,000; you’d actually have $1,459,480. With 9% total invested, the actual 401(k) balance at age 75 is $2,189,220, which is $729,740 more. That changes the doom and gloom scenario a bit, doesn’t it?
They picked age 75 to retire at because it was the age when the college graduate’s investment accounts would have enough money to return $135,728.40 a year, based on a $1,189,000 nest egg and a lifespan of an additional 9 years. This is an incredibly dangerous set of assumptions, since half of this group will live longer than 9 years, but would have completely run out of money by year 10 (assuming a 4% annual return during retirement with 2% inflation).
Now, let’s look at someone who never went to college. Assuming the high school graduate earns the same 3% raise each year as the college graduate, the high school graduate could retire at age 72, or 3 years earlier, with a nest egg of $1,534,283, which would provide him with 80% of his pre-retirement income without including Social Security benefits! Add in Social Security benefits and his nest egg might last until 88.
Clearly the whole study is silly, for many reasons. The first is that it highlights how ridiculous it is to plan your retirement on your current or future income. Does anyone really think someone who is earning $1,981,051 less over their lifetime than another person, which is the difference in the total incomes over the first 50 years of the high school and college graduates working careers, could retire earlier? The second, and perhaps most important, is that averages are useless when talking about retirement planning, so don’t get in the habit of comparing yourself to average.
Average student loan debt is high because of graduate students taking on additional debt, the high cost of law and medical schools, and from students financing education at for-profit schools. The average student loan debt for a 4-year graduate of a public school was actually $16,830 in 2012, nearly half the figure used by NerdWallet.
NerdWallet stated that the average student loan debt in 2012 was $29,400, but that’s not exactly true. They also stated the average student loan debt in 2015 was $35,051, though no evidence is provided to back this number up.
The average amount of student loan debt for students who had student loan debt in 2012 was actually $27,850 per borrower, which was an average of $21,723 per student. It’s unlikely average student loan debt went up more than 50% in 3 years.
Anyone can argue over numbers, and it’s unlikely the piece was written with the intent to have the newly graduated believe that the likely age he or she can retire is 75. Why then is their analysis dangerous? Because it can make new graduates think that there’s no point in planning for retirement now, since it won’t be possible to retire anyway.
Just the opposite is true. There are many things new graduates can do today to make sure they not only don’t retire at age 75, but can retire at age 50 if they want to. Small spending decisions now add up to serious savings at retirement. When you’re young, you have time on your side. Start saving now.
If you’re that average college student making $45,478, and your company is giving you 3% towards your 401(k), invest 12%. If you get a 2% raise each year with a 7% return, you’d have $2,351,905 at age 67. Sock away 20% and you could retire at age 60 with $2,121,889.
And ultimately, that’s probably the point NerdWallet wants to make. Everyone, not just college graduates, needs to realize the decisions they make today impact their ability to have a financially secure retirement tomorrow. College students, think about if you need to take out that last student loan. Think about if you should take a part-time job on campus. Don’t spend excess funds at the end of the term from loans or scholarships.
Obstacles, especially when you’re young, only get in your way if you let them. Sure, rents can be high, but you also don’t have to live alone, and you don’t have to live in an expensive area. Nor do you have to let fear get in the way of saving for a down payment and buying a house. Everyone can come up with a million excuses as to why they have to spend more money; your challenge is to come up with ways to save it.