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Generation X Most Concerned About Financing Retirement
Helping them develop money management skills may ensure adequate savings

By Stephen Miller, CEBS  10/25/2012

Americans are less confident now than just three years ago that they will have enough financial resources to last through their retirement years, according to a Pew Research Center survey on retirement planning conducted in the latter half of 2012.

About four in 10 adults (38 percent) said they were “not too” or “not at all” confident that they will have enough income and assets for their retirement. In comparison, only 25 percent were that pessimistic in the first quarter of 2009 as the economy began a tepid recovery from the “Great Recession.”

Concerns about retirement financing are now more heavily concentrated among younger and middle-aged adults than among those closer to retirement age. According to Pew researchers, these younger age groups have suffered the steepest losses in household wealth in recent years.

Among Generation X adults between the ages of 36 and 40, more than half (53 percent) said they were either “not too” or “not at all” confident that their income and assets will last through retirement. In contrast, only about a third (34 percent) of those ages 60 to 64 expressed similar concerns, as did a somewhat smaller share (27 percent) of those 18 to 22 years old.

Worries Across Income Groups

Confidence fell the most (19 percentage points, to 51 percent) among those earning $30,000 to $49,999, and by 14 points in families with incomes of $75,000 to $99,999, according to Pew. At the same time, the proportion of those making $50,000 to $74,999 who are confident about their retirement nest eggs declined by 11 points.

Concerns over financial security can have a negative impact on employee productivity and engagement. In addition, a Towers Watson survey conducted in April and May 2012 among large U.S. employers found that nearly half of respondents (48 percent) expected a greater number of older workers will ultimately delay retirement.

Insufficient Savings

Adult Americans with access to an employer’s 401(k) plan are not contributing enough to provide for a secure retirement, according to an analysis by financial services firm T. Rowe Price. Approximately two-thirds (68 percent) of plan participants were contributing 10 percent or less of their salaries, excluding any employer match, to their plan as of August 2012. By contrast, many financial advisers recommend that employees strive to save at least 15-20 percent of their annual income, including any employer contributions, in order to have a better possibility of living comfortably in retirement.

Another red flag: 29 percent of participants weren’t sure how much they are currently contributing to their retirement plan.

“Although competing financial priorities make retirement saving difficult for many people, many need to boost their retirement savings amount, and they also need to be more fully engaged in the savings process,” commented Christine Fahlund, CFP, senior financial planner with T. Rowe Price, to SHRM Online. “Saving early in adulthood increases the compounding of earnings over a decades-long period. That can significantly improve the chances that younger investors will be prepared for retirement. Trying to make up later for lost saving time can be very difficult, at best,” she noted.

“Many investors are getting the message, but there is a clear need for ongoing education to reinforce how important it is to save early for retirement,” Fahlund advised. 

Middle-Income Workers Saving Less Than 5% of Their Income for Retirement

Two-thirds of middle-income ($40,000-$99,999) American workers are saving less than 5 percent of their annual income for retirement, and many are saving nothing at all, according to fourth quarter 2012 research by LIMRA, a financial services research organization.

One in four workers ages 18-34 reported not saving at all for retirement. While more workers age 35-54 report saving some percentage of their income for retirement, almost one in five are not saving for retirement at all.

"Optimally, all people should be saving systematically throughout their careers to ensure they can amass the funds necessary to live the lifestyle they wish in retirement," said Matthew Drinkwater, associate managing director for  LIMRA's retirement research. "Many Americans' plans include delaying retirement or not to retire at all, but our research has found that more than half of current retirees retired before they planned—often involuntarily. It is important that Americans take the steps to prepare for every contingency while they are drawing an income."

Financial Education Can Help

Research conducted by the Federal Reserve Bank of Kansas City indicated that employer-sponsored financial education improves personal financial outcomes and work outcomes, SHRM’s HR Magazine reported in June 2012.

In particular, developing basic money management skills is a key component leading to adequate savings for retirement, according to an October 2012 study, State of U.S. Employees Retirement Preparedness, by Financial Finesse, a provider of worksite financial education programs. “Employees that are on track to achieve their retirement goals have a handle on their debt,” the study notes. “Employees that continue to carry debt have less money to put toward savings, and are therefore more likely to delay retirement, or be required to live on less in retirement.”

Poor money management skills, coupled with long-term economic factors, pose a serious risk to employees’ long-term retirement security, concurred Trisha Brambley, founder of Retirement Playbook Inc., a firm that provides retirement plan consulting to employers.

“Increases in health care expenses, taxes, inflation and life expectancy, coupled with decreases in government and corporate retirement benefits, will be most stark for Gen X and Millennial employees,” according to Brambley. “When you consider that over a third of the employees are taking out retirement plan loans and hardship withdrawals, and that most employees do not have emergency savings to rely on in times of trouble, employees are caught between a rock and a hard place. They need to save more, but until they change their financial habits, they will be unable to.”

Bob Benish, president of the not-for-profit Plan Sponsor Council of America (PSCA), echoed Brambley’s sentiments, noting that recent 401(k) plan design improvements, such as auto enrollment and auto escalation, “provide an excellent foundation, but in this economy, more needs to be done to help employees prepare for the challenges ahead.”

Financial Fitness Action Steps

In a Q&A accompanying her firm’s report, Financial Finesse CEO Liz Davidson noted, “We need to institutionalize financial education into our workplaces as a key employee benefit,” and that these efforts should focus on “helping younger employees adjust to the fact that they will have more of funding burden, and more obstacles to overcome, than their parents and grandparents. We can’t change that reality, but we can and should help employees manage it.”

She advised employers to follow a set of best practices that includes the following:

Committing to helping employees develop the financial behaviors and habits they need to save enough for retirement and other financial goals.

Assessing their workforces regularly to figure out what their priorities and vulnerabilities are and design programs around their employees’ most pressing issues and concerns.

Incentivizing employees to participate in the program, recognizing that the return on investment of a financially healthy employee is high enough to merit financial incentives.

Typically, employees who use these best practices see two to three times the savings rates in their retirement plans as those who don’t, said Davidson.

Income-Management vs. Investment Advice

Similarly, the 2012 TIAA-CREF Financial Advice Survey of U.S. consumers by retirement plan provider TIAA-CREF shows that nearly half of all surveyed Americans admitted they worry about their long-term financial future, and one in five said finding relevant financial advice was difficult. Nearly half—49 percent—were unsure if they’ve saved enough to retire.

Among other key findings:

Advice about spending habits was relatively likely to prompt action; 56 percent of consumers said they changed or lowered their spending since receiving advice.

However, suggestions about retirement investment strategies weren't followed as faithfully. Only about three in every 10 Americans who received financial advice said they've changed their asset allocations in the wake of receiving advice.

These findings suggest that basic financial education on budgeting/managing income and paying down debt may provide more "bang for the buck" than investment advice about portfolio construction and risk moderation.

Rather than trying to turn employees into portfolio managers, a better path, some experts advise, is to educate employees on how to increase their disposable incomeand why they should contribute more of that savings to their retirement planand then to default their investments into a risk-appropriate target-date retirement fund.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Articles:

Employers Doubtful of Employees’ Retirement Readiness, SHRM Online Benefits, October 2012

Generational Differences Exist, But Beware Stereotypes, SHRM Online Diversity, October 2012

Age-Based Savings Benchmarks, SHRM Online Benefits, September 2012

Work to Age 70? For Many, That Won’t Be Enough, SHRM Online Benefits, September 2012

Encourage Employees to Defer Adequate Pay to a 401(k), SHRM Online Benefits, May 2012

Financial Stress Contributing to Productivity Loss, SHRM Online Benefits, April 2012

Financial Education – Stress = Improved Productivity, HR Magazine, June 2012 

Related External Resource:

How to Design and Implement Behavior Changing Financial Wellness Programs, Financial Finesse, 2012

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