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%.