Say It Ain’t So! Millennials Turning 40

Hard to believe, but the oldest of the millennials – those born between 1981 and 1996 – are about to turn 40.

The generation that some thought would never move out of Mom’s basement is now marching toward middle age.

And despite all those earlier concerns, America’s largest living adult generation is doing quite well, thank you.

Nearly 44 percent of millennials have earned a bachelor’s degree or higher, half own their own home, and 60 percent are contributing to a retirement account, according to the National Endowment for Financial Education.

That said, millennials still report feeling insecure about their finances. They struggle with overspending, and carry more debt than other generations. It’s a constant challenge to find a balance between living the lifestyle they want, but saving enough for their future security and comfort.

Getting closer to the big 4-0 milestone should be a wake-up call to millennials who don’t have a cohesive financial plan in place or who have not yet started saving for the future.

A financial plan need not be complicated: it’s all about deciding where you want to go, and what you need to do to get there.

Here’s a quick rundown of where you want to be in your savings strategy, and what steps you can take if you’re a little behind the curve.

Are you on track?

There’s an easy way to see if you are on track with your savings. You don’t need a computer or even a calculator. One of the most revealing ratios used by financial planners to measure whether you are on track to meet your financial goals is also one of the easiest. We call it the Assets to Income Ratio, and it looks at whether you have accumulated enough savings for your future needs, given your current age.

How to compute it

Compare the value of your total savings to your annual income to see if you are on track for what’s ahead. Hint: ignore the value of any equity in your home but do include your 401(k), IRAs and other investment accounts. For example, if you and your spouse/partner have investments totaling $200,000, and your combined income (before-tax) is $100,000, your ratio is 2:1 (meaning your assets are equal to 2 times your income).

How do you measure up?

You get a passing grade if your accumulated assets hit these targets at each age:

Age 35: Assets equal to 1-2 times your income

Age 45: Assets equal to 3-4 times your income

The goal is to have assets valued at 10 to 12 times your annual income by the time you reach age 65.

If you’re nearing age 40, assets worth one to two times your annual income is a good benchmark to aim for.

What to do if you are behind target?

In some cases, you may be better off than your Assets to Income Ratio would suggest. For example, if you will receive a healthy pension, or your mortgage is fully paid off, or you’re extra frugal with your spending, then you may be able to get away with lower asset levels and still maintain your lifestyle after you stop working.

Otherwise, if haven’t progressed to where you should be, you can still meet your goals if you ramp up your savings, plan to work longer, or are willing to substantially downsize your lifestyle in retirement.

If you have a financial advisor, ask them to discuss your options and customize a plan to get you back on track. The good news for millennials? You have plenty of time to play catch up. Investing a little extra each year, or perhaps revamping your investment mix to make sure you’re capturing enough growth, can put you back where you need to be.

If the target amounts you need to save seem high, there’s a reason for that. Keep in mind that, for every $100,000 you have saved, you may be able to safely spend only $4,000 per year in retirement to ensure your funds last thirty years or more. That’s a function of expected longevity as well as today’s low interest rates and modest return expectations.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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