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Millennials may need to double how much they save for retirement

(Washington Post illustration)

The projections are in and Wall Street analysts have pretty low expectations for how the stock market will perform this year.

A roundup of the figures shows that strategists project the Standard & Poor’s 500-stock index will gain 4 percent on average in 2017 — the lowest expected annual gain for the stock market since 2005, according to an analysis by Bespoke Investment Group.

While it’s impossible to predict exactly what the stock market will do, investing pros over the past several months have been reducing their expectations for what they think the stock market will return, not only in the next year, but potentially over the next couple of decades.

If those gloomier outlooks hold true, workers saving for retirement today may not get as much from their portfolios in the long term as previous generations did. Advisers say that millennials, who are decades away from retirement, will need to save more — in some cases twice as much as they were saving before — to make up the difference.

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“Realistically, most people who are reading this article probably should expect to work a little bit longer than their parents did,” said Tim Koller, a partner with the consulting firm McKinsey.

Even a small drop in market performance can make a huge difference.

If average annual stock market returns fall by two percentage points over the next couple of decades, a 25-year-old saving for retirement would need to more than double how much she is saving to make up the shortfall, according to an analysis by the Employee Benefit Research Institute.

The pessimistic predictions come at a time when younger workers are already struggling to save for retirement while they pay off student loans, face high child-care costs or deal with rising rent. But firms such as McKinsey predict that U.S. stock markets may not deliver as much as they have in years past, putting more pressure on millennials to save as much as they can. U.S. stock markets returned 7.9 percent a year on average between 1985 and 2014, a track record that Koller and other economists say is unlikely to be repeated.

The reason for the dismal view is that stock market gains were so robust over the past 30 years that it will be pretty tough for the stock market to match those returns going forward, some economists say. Stocks have grown pricier as the market has climbed higher, giving them less room to grow.

If the economy grows more slowly, that could also drag down stock market returns, Koller said. The U.S. population is not growing as quickly as it did, which could lead to fewer workers and reduce the amount of services and goods that companies can produce. At the same time, more people are retiring than are entering the workforce, which means that the number of people selling stocks to pay for living expenses is increasing faster than the number of people who are buying stocks in their retirement accounts.

GMO, a financial firm that accurately predicted the previous two market downturns, announced in September that it expects U.S. stocks to fall by an average 3.6 percent a year for the next seven years. John Bogle, who founded the investment firm Vanguard, said market returns will “inevitably” be lower over the next decade.

Exactly how much millennials should be saving for retirement in light of these lower projections is up for debate. Many financial advisers recommend that workers aim to save between 10 and 15 percent of their pay. But other experts say millennials should save much more, up to nearly a quarter of their income, to avoid running out of money in old age if stock market returns fall.

For instance, the personal finance website NerdWallet recently estimated that millennials need to save 22 percent of their paychecks to have enough cash in retirement if stock market gains are weaker going forward. The study assumed that workers would not receive any income from Social Security, in response to a survey from the Pew Research Center finding that 51 percent of millennials assume the entitlement program won’t be there for them when they retire.

But if young workers can’t sock away that much, the bottom line is to start saving, and investing, as soon as possible, financial advisers say.

Workers who aren’t saving as much as they want to can aim to get there over time by having their contribution rate increase automatically by one or two percentage points each year, financial advisers say. And taking advantage of matching contributions from an employer can help. For instance, a worker can get to a target 15 percent savings rate if he contributes 12 percent of pay and receives a 3 percent match from his employer.

“The first step is usually just to do something,” said Brian Nelson Ford, a financial well being executive for SunTrust Bank who recommends that young people aim to save at least 15 percent of their pay. “Taking action and taking control of what they can control is vital.”

Three ways from the Washington Post that student loan debt can affect your plans for retirement. (Video: Dalton Bennett, Jonnelle Marte/The Washington Post)

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