Targeting Generational Issues in Retirement EducationMarch 12, 2013
Beyond the general education about how
to much to save and how to invest, retirement plan participants have issues at
different life stages that need to be addressed.
There are many issues
that are not “one size fits all,” and can differ by generation, says Rich
Rausser, senior vice president of Client Services at Pentegra Retirement
Rausser told PLANADVISER he
thinks Baby Boomers (born 1946 to 1964) think about retirement very differently
from other generations since they are closer to it. Thinking shifts from 'How
much should I save?' to 'Do I have enough?', he explained. More complex issues
come into play, such as timing of distributions, tax planning, when to take
Social Security and whether to take one source of income at a time or blend
Rausser suggested plan
sponsors focus on educating Baby Boomers about distribution options and
strategies. Plan sponsors should make sure participants understand the
distribution options for their retirement plans. But, beyond the form of
payment, Baby Boomers need education about how to time distributions and tax
planning. Plan sponsors can use plan advisers, providers or other experts to
deliver this education.
According to Rausser,
Generation X (born 1965 to 1976) are in their peak earning years, but they have
other financial obligations tugging at them, so they face tough choices about
saving for retirement. Some still have young families and are looking to buy a
house; others are saving for or getting ready to pay for children’s college
expenses. Many are concerned they are jeopardizing their long-term retirement
success by not accumulating savings for themselves.
Rauser said one of the best things a plan sponsor
can do for Generation X is a gap analysis—comparing their income replacement
needs with how their current savings will cover that income. This will show
them if saving at their current rate is enough, but many will find out the gap
is wider than they think, Rausser contended. To fill the gap, they can either
reset their expectations of retirement, increase contributions to retirement
plans or change to more aggressive investments. Always tell the Generation X
group to pay themselves first, Rasser said, because their biggest risk is
putting other needs ahead of retirement needs.
For Generation Y (born
1977 to 1990), there are choices to make between needs and desires, which can
have significant consequences for the future. Rausser pointed out that many are
making real money for the first time and may want to splurge on things they
want, but many are also on their own for the first time and face student loan
debt or the need to purchase a car in addition to regular household bills.
According to Rausser, even if they are saving, it is not enough. Often
Generation Y sets aside 5% to 6% of income early, but lets it ride, he
explained. Retirement savings should be evaluated annually; assuming salaries
increase throughout a career, maintaining a 6% contribution over a 40-year span
creates a shortfall.
For Millennials (born
1991 and later) retirement is not a priority at this point; they may have a
hard time imaging that far down the road. If they start saving from day one, it
will be easier to do so as their careers develop, becoming a habit, Rausser
contended. And, they will come to appreciate that habit when they see how much
their savings has accrued.
For both these
generations, the advice to pay yourself first is also important. But, this is
where automatic plan features, such as automatic enrollment and automatic
escalation come in, Rausser said. He suggested plan sponsors use these features
to help the younger generations of participants.
Illustrations of how
savings accumulates over time are also helpful. One tool Pentegra uses shows
participants how a person who started saving early, even if that person stopped
contributing after 10 years, accumulates more savings than a person who starts
saving 10 years later and continues. “The very first dollar you put into
savings is the most valuable in terms of long-term compounding,” Rausser noted.
If their retirement plan offers a company-match contribution, plan sponsors
should also stress to participants how they are leaving free money on the table
by not contributing, he added.
Rausser concluded that for all age groups, plan
sponsors should be educating participants about the cons of taking a plan loan
or hardship distribution if it is not a real necessity. Participants could be
jeopardizing their ability to have a successful retirement if they take their
savings out of the plan.