Millennials, once considered poor savers, seem to be changing their ways.
In the past year, young investors have ramped up retirement savings, particularly into individual retirement accounts, according to new data from Fidelity Investments, the largest provider of IRA plans by assets.
The percentage of millennials—those between ages 18 and 34—making a contribution to their IRA was 26 percent higher in the first quarter of 2015 than during the same period a year ago, Fidelity data show. Overall the percentage of investors contributing to an IRA account also rose, but only by 7 percent. IRA contributions from the under-35 age group made up more than one-quarter of the total IRA contributions recorded by the firm.
An improving job market and an entrepreneurial spirit may be contributing to the trend, said financial advisor Douglas Boneparth of Life and Wealth Planning in New York. "Jobs had simply dried up as we dealt with the economic fallout from the last recession. We might be seeing those same young professionals now in the workforce with the capacity to save for retirement," he said. "Many millennials have also pursued more entrepreneurial routes and have been busy growing their business over the last three to five years. Perhaps their hard work is paying off and business profits are being turned into retirement savings."
The majority of younger investors are allocating their assets in accounts that will potentially allow for decades of tax-free growth. In the first quarter of 2015, nearly eight in 10 Fidelity IRA customers who were under age 35 made contributions into a Roth account. Roth IRAs allow investors to make after-tax contributions and, generally, earnings grow tax-free. Roth IRA investors can then make withdrawals tax-free after age 59½ and there are no required minimum distributions. In 2015, the maximum traditional or Roth IRA contribution is $5,500 ($6,500 for those 50 or older).
The average millennial's IRA contribution is about $2,450, Fidelity said, about $700 less than the overall average IRA contribution. However the average age of an IRA holder is about 52, according to the Investment Company Institute. A 30-year-old who invests $2,450 every year in a Roth IRA could amass over $90,000 in total contributions and see their nest egg grow to over $200,000 (assuming a 4 percent annual return and a marginal tax rate of 25 percent) by the time they reach age 67, according to Bankrate's Roth IRA Plan Calculator.
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Financial advisors say setting up a regular savings strategy is critical to ensure these young savers are financially secure when they retire. "The large increase in the percentage of millennials contributing to their IRA is very encouraging given that millennials have been poor savers to this point," said Patrick O'Shaughnessy, a portfolio manager at at O'Shaughnessy Asset Management and author of "Millennial Money."
"The key now is for these new savers to make their retirement plan consistent: Save more and more every year and don't get scared out of the markets the next time they drop," he added.