Administration October 23, 2015

'Financial Independence' a Better Buzzword than 'Retirement'

Generation Y expects to work until they die, “so why bother saving in a retirement plan.”
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Generations X (born between the mid-60s and early 80s) and Y (born between the mid-80s and 2000) are more pessimistic about retirement than Baby Boomers.

A study from Northwestern Mutual found a strong majority (66%) of Gen X expects to work past traditional retirement age due to necessity, with two in 10 (18%) believing they will never retire. In addition, nearly three-quarters (73%) of Gen Y expect to work past 65, acknowledging that in old age, safety nets will not be there for them and Social Security will not take care of their needs.

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But, Sarah Simoneaux, a consultant with Simoneaux & Stroud Consulting Services, told attendees of the American Retirement Association’s 2015 ASPPA Annual Conference that Generation X “loves work/life balance.” They don’t want to work forever, she says, so they feel they need more than a 401(k) to prepare financially.

Natalie R. E. Wyatt, vice president of business development at Innovest Systems, added that a Scottrade/Pew study found Generation Y expects to work until they die, “so why bother saving in a retirement plan.”

Yet, both of these generations want to be debt-free and obtain financial independence. They need a retirement plan design and message that speaks about financial independence or flexibility, not retirement, Simoneaux said.

NEXT: Designing plans for younger generations

Plan sponsors need to design plans and communicate about them with outcomes in mind, Simoneaux suggested. For example, “some think if the employer matches up to 4% of pay, that’s all they need to save, and participants should know the advantage of saving in a Roth account after deferring pre-tax dollars up to the match.” Gens X and Y want to get their money out tax-free, she contended.

In addition, Simoneaux noted that studies show a majority of the younger generation have their savings in “safe” investments. “They don’t trust others with their money,” she said.

Automatic enrollment into a target-date fund will help Generation Y get out of their comfort zone, and will making saving and investing easy for Generation X, who may be busy or overwhelmed by choices.

And the message should focus on financial independence and flexibility. Plan sponsors should consider adding other benefits, such as non-qualified plans, health savings accounts (HSAs), student loan repayment plans or payroll deduction individual retirement accounts (IRAs), Simoneaux suggested.

Let them know if they use these tools, they can have flexibility later in life, whether they want to stop working, only work part-time or continue working.

Data and Research October 23, 2015

Early 20s Is Go Time for Retirement Saving

ADP marks National Save for Retirement Week by highlighting the power of stocking money away at your first job—and all your jobs after that.
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Only about four in 10 (41%) U.S. employees ages 20 to 24 are currently saving for retirement, according to a new analysis from the ADP Research Institute.

“It’s no mystery that as employees age, they take retirement planning more seriously,” explains Joe DeSilva, senior vice president and general manager for ADP Retirement Services. However, the research shows people tend to overestimate their ability to “play catch-up” and stick around in the workforce after age 60. Further, DeSilva says, playing catch-up “takes away employees’ ability to capitalize on the power of compounding earnings to help their retirement savings grow.”

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The study shows a more favorable 65.5% of employees ages 55 and older are contributing to a retirement plan or are otherwise regularly saving for the years after work, with varying degrees of success. ADP says this pattern of older workers saving more for retirement than younger workers continues to hold true from earlier research, and highlights the need for employers to refine their financial education strategies to ensure they are addressing the distinct priorities, needs and desires of each demographic within their workforce to encourage retirement planning.

ADP finds deferral rates also increased with age, with employees ages 20 to 24 years deferring on average only 4.6% of salary, while employees ages 55 and older deferring on average 8.5% of salary. “Additionally,” the analysis explains, “even as employees race to catch up and save more, average savings levels never approach the optimal double-digit savings rates that are recommended by financial experts.”

“We believe that providing plan participants with access to financial education throughout all stages of their career can help to reinforce the importance of retirement planning and increase their financial security,” De Silva adds.

NEXT: Tips for the generations

The ADP analysis shares specific tips for each generation currently in the workforce or retirement, as well as tips plan sponsors can use with today's multi-generational workforce.

For Baby Boomers, defined as those born between 1946 and 1964, ADP says there is absolutely no way to get around the need to save a significant portion of current income should one want a financially secure retirement. One specific tip: “Try living on your retirement income now. By putting away more of your pay for retirement savings, you can add to your nest egg while adjusting to your new income level in retirement … If you are age 50 or older, take advantage of catch-up contributions and review your asset allocation in your retirement plan account. Ensure your investments are appropriate for your age and risk tolerance.”

For Generation X, those born between 1965 and 1980, ADP says don't wait to reach the catch-up contribution age of 50 before saving up to the Internal Revenue Service (IRS) limits—which largely remain unchanged heading into 2016. “Save more now to take advantage of compounding earnings,” the analysis urges, and “maximize your savings during your prime earning years by choosing to automatically increase your retirement plan contribution every year.”

Another important piece of advice for Gen X: “Save for retirement first. You can borrow for your child's college education, and you can purchase long-term care insurance for elderly parents, but you cannot borrow for your retirement.”

For Millennials born after 1981, “don't wait to save until all your college loans are paid off,” ADP says. “Save now to take advantage of compound earnings. Establish good money management habits; focus on saving, smart budgeting and planning for emergencies.”

The full study is available here: “How Employers Can Extend Coverage andSimplify the Retirement Readiness Process.”

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