While employees wake up to saving as retirement nears, by the time they attempt to “catch up,” their greatest investing advantage has already passed them by in terms of taking advantage of compounding earnings over their career, according to a recently released study by the ADP Research Institute.
Indeed, while “lack of employment and educational debt are [savings] hurdles for Gen Y,” said Chris Augelli, VP, product marketing and business development at ADP Retirement Services, during a Tuesday presentation at the Society of Professional Asset Managers and Recordkeepers annual conference in Washington, “hopefully we can get Gen Y to follow the guidance of the older generation.”
The 2013 study of 9 million full-time U.S. employees with incomes of $20,000 and higher found that while 64% of employees ages 61 to 69 are saving for retirement, with an average deferral rate of 9.2%, 48% of Gen Yers age 20 to 29 are saving, at an average of 4.9% of their annual salary.
ADP’s research excluded employer contributions, and assessed employee contributions to 401(k), 403(b), traditional and Roth IRAs and other retirement accounts. The study revealed that 60.2% of employees of all ages were saving for retirement at an average salary deferral rate of 6.7%.
The “lag” in savings by Gen Y’s is “behavioral,” Augelli said, as “people don’t grasp the importance of saving until it becomes an immediate need.”
Assuming a retirement age of 61, the ADP analysis estimates that approximately 18% of the total workforce from 2013 might retire in the next five years.
(Studies show that while the official retirement age is 65, the average actual retirement age is between 61 and 64).
Of those not nearing retirement in the next five years, 59.1% saved at a rate of about 6.2%. In contrast, of those reaching the average retirement age in the next five years, about 65.5% saved at a rate averaging nearly 8.7%.
The proportion of workers saving and their saving rates varied widely across industries, the analysis found, with the leisure and hospitality sector having the lowest percentage of workers saving (37%) and one of the lowest savings rates at 6.3%.
In contrast, 70% or more of workers in the financial and information industries were saving for retirement, and their savings rates were among the highest. However, the study notes that a large proportion of those working in leisure and hospitality earn lower wages than in those in the finance sector.
Indeed, the study found that those who earned a higher salary saved at higher rates. Among those earning more than $110,000, the proportion of those saving was more than 80%, compared with 37% of those earning from $20,000 to $30,000 who saved.
Women also tended to save more than men, with 74% of women earning more than $60,000 saving at an average rate of 7.0% compared to 66% of men earning the same amount saving at a 6.4% rate.
The study also found that regardless of industry, in larger companies, a higher percentage of employees were participating in a defined contribution plan. However, employees in smaller companies who participated were saving more; in every industry, those in companies with 1 to 19 employees saved on average more than 7%.