New grads might not retire until 75, new study finds

How’s 75 sound for a retirement age? Too far away? That could be the reality for today’s college graduates, according to NerdWallet research released today.

The study looked at how rising student loan debt and higher rents are squeezing 2015 graduates. Those costs have risen 19% and 11%, respectively, since NerdWallet last looked at millennials and retirement.

The previous study, published in 2013, projected a retirement age of 73 for that year’s grads. Today’s higher expenses could tack two years onto the careers of millennials, forcing them to work 13 years longer than today’s retirees, who have an average retirement age of 62.

The true cost of debt

High student loan and rent payments limit millennials’ ability to save early, says Kyle Ramsay, the investing manager at NerdWallet. That means they miss key opportunities for compound interest to boost their retirement funds.

Compound interest helps money grow over time: A 23-year-old who invests $10,000 at a 6% return today could end up with twice that amount in 10 years — and 20 times that by the time he’s 75. That’s with no further savings contributions.

“A lot of people don’t understand that at this age, your biggest asset is time,” says Stephen Hart, a certified financial planner with Talis Advisors in Plano, Texas. “The longer you have to take advantage of compounding interest, the more money you’re going to have. Waiting a year or two now to start putting money away means a lot less money in 35 or 40 years.”

The burden of repaying student loan debt, which now averages more than $35,000 at graduation, could cost graduates close to $700,000 in lost retirement savings because of the missed compounding interest on that money they could have otherwise invested.

Millennials wary of investing

Millennials who do find money to save shy away from investing it. Research by State Street, a financial services holding company, found that millennials have 40% of their investable assets in cash, such as checking and savings accounts, and term deposits such as CDs.

In the two years leading up to the May 2014 State Street report, millennials increased their cash allocations at a rate similar to baby boomers. But unlike millennials, baby boomers were liquidating some assets for retirement income.

“Millennials read about how high the stock market is and that we’re overdue for a correction or worse, and — even after the recent correction — still see risk in the markets,” says Daniel Sheehan, president of Sheehan Life Planning in Fresno, California.

The markets always carry risk, but historically, long-term investors who ride out stock market waves benefit from investment returns. And millennials have a lot of time on their side.

“My advice to millennials I speak with is to realize that throughout the history of the investment markets, there have always been traumas,” Sheehan says. “For those who invest wisely — allowing the market time to do its work by compounding — there isn’t a better way to invest for their future than the stock market.”

Most experts recommend that an investor in his 20s allocate 80% to 90% of his retirement portfolio to stocks, typically via low-cost index funds.

Small changes can add years to retirement

There is hope. The study also dug into how millennials can take steps now to move retirement years closer. could move to target a more reasonable retirement age.

Recent grads who are able to live at home for a few years and spend that time saving more  could lower their expected retirement age by five years, Ramsay says.

Even if that’s not an option, making smart savings decisions in general can make a big impact: Millennials should max out employer 401(k) contributions before saving in atraditional IRA or a Roth IRA, and make sure their asset allocation is appropriate for their age. (Here are NerdWallet’s picks for best Roth and traditional IRAs.)

Those who increase their savings rate will be rewarded with a longer retirement. NerdWallet’s calculations for a 23-year-old new grad earning the median starting salary of $45,478 found that saving 10% annually could bring that retirement age down to 70. Someone who can put away 15% would be able to retire at 65.

Those increases in retirement contributions can be made gradually, bumping up a few percent a year. Lean years — such as those spent paying off student loans — can be balanced out by saving more during years that are flush.

“Make savings contributions as a percentage of income, instead of a dollar amount, because that makes it easier psychologically,” Hart says. “As you get raises, your contributions will grow with them.”

Finally, identify cash to save by creating a budget and tracking your spending, Hart adds. “Even if you just do it for a month — you can do anything for a month — you can sit down at the end and look at where your money is going, and that’s where you’ll find more disposable income to save.”