Millennials are on track for better retirement than boomers, Vanguard study finds

Much has been written about the wealth gap between baby boomers and millennials, with the younger generation on the losing end. But in the long run, millennials may retire in more comfort than their elders.

That's according to a recent study from Vanguard, which found that for the most part, Americans born in the 1980s and early '90s "enjoy a brighter retirement outlook than boomers." 

"We saw that, for most income cohorts, you see an improvement in retirement readiness … as we move from generation to generation, starting with late baby boomers to early millennials," said Fiona Greig, Ph.D., one of the study's co-authors.

The study measured this readiness in terms of how much of their pre-retirement income these Americans will be able to "sustainably" replicate after they leave the workforce, using their retirement plans, Social Security and other resources.

By that measure, Vanguard found that median-income "early millennials" — defined as those currently aged 37 to 41 — are on track to replace 58% of their pre-retirement earnings, while median-income "late boomers" — defined as those aged 61 to 65 — will only be able to regenerate 50%.

To be clear, neither of these rates is nearly as high as it should be. Vanguard estimated that both of these groups would need to replicate 83% of their pre-retirement income to meet their spending needs. Nevertheless, millennials are closer to reaching that goal than boomers.

"Our retirement outlook for Generation X and millennials is modestly better," the study said.

How is this possible? After all, the Americans born after World War II are currently far wealthier than their children. According to the Federal Reserve, boomers own 52.8% of the United States' total household wealth — almost 10 times as much as the 5.7% owned by millennials.

And yet millennials do have one significant advantage: They often make better investment decisions automatically. That's because over the past two decades, retirement plan features that default employees into higher savings have spread to a growing number of 401(k)s. Boomers, who began their careers at the start of the 401(k) era, missed out on these reforms. But millennials have reaped the benefits without even trying.

"We've seen a number of policy innovations that have expanded access to retirement plans," Greig said. "So the share of workers who have access to a retirement plan and participate in those plans has been increasing over decades."

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Specifically, Vanguard believes three innovations have helped millennials save: auto-enrollment, auto-escalation and target date funds. Auto-enrollment signs workers up for their retirement plans automatically, giving them the option to opt out. Auto-escalation automatically increases workers' contributions to their plans as their incomes increase — though, again, they can opt out if they wish. And over time, more and more plans have started including target date funds, which automatically adjust asset allocations as workers get closer to retirement — essentially providing a free robo-advisor.

"The combination of these enhancements has made it easier for retirement savers to join their workplace plans, increase their savings rates over time, and invest in diversified portfolios," the study said.

These features make a big difference. For example, previous Vanguard research found that auto-enrollment raised plan participation rates to 91% — more than triple the 28% who did so under voluntary enrollment.

And these reforms have been spreading quickly. In 2012, Vanguard found, only 20% of plans defaulted participants into a contribution rate of 5% or more. Ten years later, 45% of plans did so.

The bottom line is when it comes to retirement savings, millennial clients — at least those who participate in 401(k)s — are often in better shape than they think. Still, advisers can help these clients by illuminating what their plans are doing for them.

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"You can explain to them what benefits they have," said Russell Gaiser III, a certified financial planner at The Financial Guys in Buffalo, New York. "And when you're looking at their goals and objectives, you know that's a tool that they have in their toolbox to help them accomplish those. It's just a piece of the puzzle for your advice."

In some cases, advisers can persuade clients to take even fuller advantage of their plans — for example, by contributing even more of their paycheck than the amount they were auto-escalated into. But for many millennial savers, the automatic features are already doing enough.

"Even people who have no idea what they're doing are getting market exposure, in a diversified way, with consistent dollar cost averaging," Gaiser said. "The boomers didn't have that."