Looking back at research it released in February on Gen X and Gen Y consumers’ financial knowledge, during a media roundtable at the 2013 Retirement Industry Conference on Thursday, LIMRA identified five steps younger investors could take to improve their outcomes in retirement.
The first and most obvious step is for Gen X and Gen Y to improve their financial knowledge. The report found 60% of Gen X and 54% of Gen Y consumers said they had little to no knowledge about financial products and services.
“That means the right type of knowledge delivered in the right way,” Alison Salka, vice president and director for LIMRA retirement research, said on the call. She pointed out that not everyone has the same level of interest or ability, so “how it’s delivered and who it’s coming from is very important.”
The second step is to get help, according to Salka. As we reported in February, investors who work with an advisor still report low levels of financial knowledge, but are nearly twice as knowledgeable as those who don’t have an advisor.
Their financial habits are better, too. The report found 78% of investors who work with an advisor contribute to a retirement plan, compared with less than half of those who don’t. They save at a higher rate and are more likely to feel confident about their retirement, too.
LIMRA’s study found that Gen X and Y consumers have little tolerance for investment risk— yet this is the time when they should be more aggressive about their portfolio to achieve the growth needed to reach their long-term financial goal. Gen X and Y consumers who worked with a financial professional had a higher tolerance for investment risk.
“If you’re not an expert, it’s important to know where you can go to get help learning,” Salka said. “Gen Y is at a life stage to invest more aggressively because they have that ability,” but they’ve never lived in a time when markets have performed very well, she added.
The report asked how much people who use advisors rely on them, and found those who rely on advisors “to a considerable extent” were twice as likely to have saved more, Salka said.
Third, younger investors should take advantage of their employer-sponsored retirement savings plan or, failing that, start an IRA, according to LIMRA. More than half of investors under 34 are not currently contributing to a retirement plan.
“Over all, Gen X and Gen Y have similar levels of access to workplace retirement plans,” Salka said.
Contributing to a plan doesn’t guarantee a successful retirement, though. The fourth step LIMRA suggested was to continually increase contributions. If their employers don’t offer automatic escalation in their retirement plans, investors need to take it upon themselves to increase their contribution rates between 1% and 2% every year.
“Just keep saving,” Salka said. “Just keep [your] eyes on the goal and keep saving.” Right now, 3% is the most common default deferral rate. “Most people would agree that’s not sufficient," she said. "Many experts are saying you should be saving at 10%.”
Salka (left) noted that while Gen X is more likely to participate in an employer-sponsored retirement plan, they’re saving at the same rate as Gen Y. “Usually as you get older you start saving more. This is despite the fact that Gen X has longer tenure in their plan: nine years versus four for Gen Y.”
Finally, Salka urged investors not to withdraw their retirement savings. “Who’s taking money out of their plans and why are they doing it? There are a couple of different places this is happening,” she said.
One example is when an employee leaves the company. Salka noted that people may change jobs as many as seven times in their career; thus, they could have as many as six DC plans. Instead of emptying those accounts, they should consolidate them, she suggested.
Taking loans is another reason money leaves retirement plans. “Not only do they have to pay it back and pay it back quickly if they have a termination in employment, they’re also borrowing against their future,” Salka said. “The net result of these trends is that people need to take more responsibility for their retirement. I don’t think that’s a surprise; the fundamental question is how to help them.
“It’s a lot of responsibility for Generation X and Y, especially when retirement is so far off and they have other pressing financial needs,” she added.
On the differences between Gen X and Gen Y consumers, Salka noted that over all they’re fairly similar.
“A lot of the differences you see are functions of different life stages,” she said. Almost two-thirds of Gen X are married, compared with just 29% of Gen Y. Similar percentages are employed, but 22% of Gen Y said they were not in the labor force for reasons other than disability or retirement, compared with 12% of Gen X. Salka theorized that this was likely due to more members of Gen Y pursuing higher education.
Sixty percent of Gen X households have saved more than $50,000, compared with 40% of Gen Y. “Gen X has had more years to increase their salaries, as well as their savings,” Salka said. However, while they have more assets, they also have more debt.
Together, Gen X and Y have nearly $7 trillion in household net worth, the report found, with Gen X accounting for a disproportionately large percentage. Gen X households have a median income of $32,000 compared with Gen Y, which has $6,150.
Nonfinancial assets represent a significant proportion of assets, Salka said. Gen X households have about $7.5 trillion in nonfinancial assets, compared with $300 billion for Gen Y. Salka noted that 59% of Gen X and 27% of Gen Y report having primary residence equity.
“As more Gen Y consumers purchase houses and condos, their nonfinancial assets will increase significantly, but their debt likely will as well,” Salka said.
Gen X households have 43% of their financial assets in retirement accounts. Of those, 64% are in defined contribution plans and 31% are in IRAs. Among Gen Y households, 25% of their total financial assets are in retirement plans. Of that, 65% is in defined contribution plans and 31% is in IRAs.
When asked about why they save, Gen Y respondents were more likely to cite vacation or travel as their top reason for saving, while Gen X was focused on retirement.
“I don’t think this is because Gen X is by any stretch wiser; they’re closer to retirement,” Salka said. “They’re more likely to see retirement on the horizon.”
She added that while Gen Y may not have retirement as their top priority, “I do think it’s nice that retirement was in the top two.”
LIMRA surveyed 1,700 respondents in 2012 for the report, and used supplemental data from the Census Bureau’s Current Population Survey and the Federal Reserve’s 2010 Survey of Consumer Finances. In the report, Generation X refers to people born between 1965 and 1980, and Generation Y refers to people between 1981 and 1992.
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