So much retirement advice is geared towards seniors, yet it’s the middle-aged crowd that has the most to worry about when it comes to saving and investing. Soon-to-retire Boomers certainly have plenty on their plates, but between robust Social Security benefits, mature assets and some of the last pensions our workforce is likely to see, their prospects are arguably better than those of their younger counterparts.
In fact, an ongoing Gallup poll has shown that the 30 to 49 age group bears some of the nation’s greatest financial concerns. Compared to millennials and Americans 50 and older, they’re more likely to worry that they won’t have enough money for retirement, that they won’t be able to pay for college for their children and that they won’t be able to pay off their debts. They even worry almost as much as the 50 to 64 crowd that they won’t be able to cover medical costs in the event of a serious illness or accident.
Hard stats show these fears are well-founded. A 2014 Wells Fargo survey revealed that 19 percent of Americans have no retirement savings,34 percent aren’t currently saving, and the median savings across all age groups was just $20,000. Similarly, a 2014 Bankrate survey found that roughly one third of Americans between 30 and 49 hadn’t even started to save. All in all, this age group represents a great opportunity for advisors looking to educate new clients.
Mindsets and Misunderstandings
Midlife, when job experience and income are typically high, is one of the best times to save, invest and take advantage of compound interest – so why aren’t more middle-aged Americans saving enough for retirement? “It’s probably the age category where people really have the last amount of extra income left over after their bills,” said Reno Frazzitta, president of Secure My Funds. Between raising children, buying homes and allocating funds to other large expenses, it becomes all too easy to put off retirement saving until age 50 or beyond. “At that point, though, you’re just playing catch-up,” Frazzitta added.
Still, it’s often a flawed that mindset that keeps middle-aged workers from prioritizing retirement. “People in their 30s and 40s associate saving money with sacrifice,” said Edward Petersmarck, insurance and financial services sales director for M&O Marketing. “There’s no investment strategy that can protect you from that mindset.” For many middle-aged clients, adopting better savings habits is a matter of getting over that mental hurdle and recognizing the long-term rewards – and necessity – of paying themselves first.
A lack of understanding regarding investment options is also a chief concern. “The second biggest mistake middle-aged clients make is not truly understanding the taxes, fees and legal concerns of their assets,” said Petersmarck. “Do you want your fees and taxes to increase or decrease as the values of your assets grow?” Soon-to-be and certainly current retirees don’t need to worry as much as they approach the distribution phase, but fees and taxes can drastically affect net worth over a two- to three-decade time line. Savers often neglect the fees associated with 401(k)s and other tax-qualified retirement plans, for instance, and ever-changing capital gains taxes can eat into the “additional” growth clients think they’re gaining by prioritizing equities over annuities.
Risk and Reward
For middle-aged clients who aim to minimize those taxes and fees, planning strategies may not differ much from those favored by the older crowd. “While younger people supposedly have higher risk tolerances than older people, personally I approach it more conservatively,” said Petersmarck. “My clients can’t afford to gamble with their retirement plans.” Conventional wisdom says people in their 30s and 40s should invest more heavily in equities than older planners, but given the market’s volatility – and stocks’ lack of principal protection – annuities, bonds and certain insurance policies may all be better bets.