Client Service May 27, 2021

Financial Wellness Is Really About Financial Priorities

Retirement industry researchers say the pandemic will have a lasting impact on the way people rank and pursue their financial priorities, influencing their vision of ‘financial wellness’ and redefining what success with money really means.
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After living through a pandemic that has lasted for well over a year, U.S. investors’ behaviors and outlooks have clearly shifted, and their viewpoints about financial wellness have been similarly reshaped.

According to a financial priorities survey of more than 3,000 Americans published by Ameriprise Financial in April, nearly two-thirds (63%) of investors who did not have an emergency savings fund prior to the pandemic have put one in place or plan to do so soon due to COVID-19. The research shows the COVID-19 pandemic has rewritten the ways in which many investors are spending and saving their money—and they expect they’ll carry their newfound priorities into the future.

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According to Ameriprise, a majority of respondents (63%) said their household income was not significantly impacted by the pandemic, and 10% said their income actually increased. However, a quarter (25%) reported they are earning less money, with many in this group having experienced a significant loss of income.

Against this backdrop, more than six in 10 respondents said protecting their financial assets (63%) and planning for uncertainty (62%) are more important to them now than before the pandemic. Nearly half (45%) believe these shifts will be long lasting, come what may in terms of broad economic recovery.

“While the economic impact of the pandemic has unevenly affected people across the country, it has been a wake-up call to everyone,” says Marcy Keckler, vice president of financial advice strategy at Ameriprise in Minneapolis. “The extraordinary circumstances of the last year convinced many people, even those who were already on strong financial footing, to take actions they may have previously put off. Investors are paying closer attention to their finances and are making important changes to strengthen their financial situation.”

Conflicting Signals?

Related data taken from the “2021 Retirement Confidence Survey” conducted by the Employee Benefit Research Institute (EBRI) and Greenwald Research shows that 80% of retirees are confident in their ability to live comfortably throughout retirement. This is actually up from the 76% of retirees who held that view last year.

EBRI and Greenwald find 18% of workers said their hours and/or pay have been reduced since February 1, 2020, while 10% had been furloughed or temporarily laid off. In total, 39% of workers reported that their household experienced some type of negative job or income change since February 1, 2020. On the flip side, 21% of workers reported having some type of positive change in work in the same time frame.

“Even with changes in the labor market, workers’ confidence in their ability to live comfortably in retirement remains high overall,” says Craig Copeland, EBRI senior research associate. “However, while resilience may be the watchword for 2021, three in 10 workers say the pandemic has negatively impacted their ability to save for retirement due to reduced hours, income or job changes. The group that was most likely to have their ability to save impacted were those more likely to have low confidence historically, such as those who are low income, not married and having a problem with debt.”

The Ameriprise research shows nearly half (45%) of respondents reduced their spending during the pandemic, and 30% of them expect to remain more frugal with their money in the future. On the other end of the spectrum, a quarter made big ticket purchases or made investments such as a significant home renovation. Once the pandemic ends, a quarter of investors anticipate spending more money than usual on activities they had to postpone. Also noteworthy, 30% of survey participants who did not have an adviser prior to the pandemic started working with one or intend to do so soon due to COVID-19.

“A financial professional can play an important role in helping investors assess the long-term impact of their shifting priorities,” Keckler says. “Advice from a qualified adviser can help them navigate life’s twists and turns and stay on track to achieve their biggest financial goals for the future.”

New Views Post-Pandemic

Data from the Northwestern Mutual “2021 Planning and Progress Study”—an annual research project that explores Americans’ attitudes and behaviors toward money, financial decisions and broader economic issues—shows a third (32%) of Americans say their financial discipline has actually improved during the pandemic. In this group, 95% say they expect their newfound habits will stick after the health crisis subsides.

The study finds that the pandemic and related events have prompted people to get proactive with their planning. Nearly one out of five (17%) U.S. adults aged 18 and older said they didn’t have a financial plan before the pandemic, but now they have one in place. Overall, 83% of people were prompted to either create, revisit or adjust their financial plan during the pandemic.

“COVID-19 has dealt financial setbacks to so many Americans, but people are changing their behaviors and financial choices to meet those head-on,” says Christian Mitchell, executive vice president and chief customer officer at Northwestern Mutual in Milwaukee. “While we don’t know what post-COVID life will look like, we’re encouraged to see that people intend to hold on to the better financial habits they’ve developed during this challenging time.”

Among the behaviors that people say they’ve adopted and expect to maintain going forward are reducing living costs and discretionary spending (45%); paying down debt more aggressively (34%); increasing investment levels (33%); regularly revisiting financial plans (29%); increasing use of tech/digital solutions to manage finances (28%); and increasing retirement contributions (25%).

On the other hand, the Northwestern Mutual research also shows nearly half (45%) of Americans say the pandemic has impacted their timeline for achieving long-term financial security, with most saying it’s a setback of one to two years.

“An improvement in financial habits is a positive for sure, but it shouldn’t overshadow the fact that it’s coming from a place of financial difficulties for many,” Mitchell concludes. “Taking action is critical, and the first step is putting a solid plan in place.”

Data & Research May 27, 2021

Workforce Representation Will Soon Skew Younger

With more Millennials and Gen Zers now in the workforce, financial advisers and employers must rethink their engagement with these groups and reconsider the traditional benefit landscape.
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As Baby Boomers enter retirement at a rapid pace—the common statistic is that 10,000 of them retire a day—more and more of the workforce will inevitably be made up of Millennials and members of Generation Z. Because of this ongoing demographic swing, retirement industry professionals are already seeing a shift in benefits options and approaches to advice within workplace plans.

Studies by Pew Research show more than 3 million Baby Boomers retired last year. By the third quarter of 2020, about 28.6 million Baby Boomers—those born between 1946 and 1964—reported that they were out of the labor force due to retirement. At the same time, the data suggests Millennials could comprise as much as 75% of the global workforce within the decade, despite the outsized setbacks experienced by younger workers during the coronavirus pandemic.

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“As more Baby Boomers retire, a larger percentage of the participants in these plans become Millennials, and even Gen Z, as they start entering the workforce,” says Jeff Mattonelli, a Gen Z and Millennial financial adviser at Van Leeuwen and Co. in Trenton, New Jersey. “With a younger population making up the largest percentage of the workforce, it’s requiring employers to think about those plans a bit differently.”

As Mattonelli explains, Millennials, the oldest of whom are now around 40, have been facing financial challenges for most of their careers. Many entered the workforce during the recession of 2008, only to survive yet another massive and unexpected economic downturn a little more than a decade later, this time caused by a pandemic. For many, retirement planning has always played second fiddle to addressing student debt and solving for shorter-term financial priorities.

Megan Gerhardt, a professor of management at the Farmer School of Business at Miami University in Oxford, Ohio, who studies how different generations shape workplace culture, says retirement-focused advisers should be asking themselves questions about how they can remain relevant for Millennials and Gen Z. She recommends plan advisers sit down with Millennials and Gen Zers alike to plan out a road map for their futures.

“What are their priorities now, or have they made any plans or savings actions?” she asks. “Are they thinking about retirement currently, or are they focused on paying down debt, saving in a rainy-day fund or earning enough to pay bills and other costs? Or maybe it’s a combination of all. Approach and ask them. Don’t assume that they define or think about the retirement timeline the same way that older generations did.”

“A retirement plan offered through an employer may be their first experience with investing or saving for some long-term goal,” Mattonelli points out. “It’s really important that there is sufficient education that is provided in a simple and concise way. The education should clearly spell out what benefits there are to participating in a plan like this.”

For example, explaining the benefit of compound interest over a long period of time can be extremely powerful. So can a demonstration of how adding merely a $100 contribution from every paycheck can build up significant wealth over time. Offering a pros and cons list for workplace plans and informing workers about pre-tax contributions, withdrawal limits and matching rates builds their knowledge and potential interest in participating, Mattonelli adds.

Mattonelli also highly recommends employers add a matching contribution if they are financially able to and have not already done so.

“Employers who offer a match tend to see a much higher participation rate,” he says. “Employees want to take advantage of any match their employer is making, so offering those features and highlighting them is an important way to encourage those younger participants.”

Outside of traditional retirement benefits, advisers can encourage employers to consider a student debt repayment or student debt refinancing program. With potential changes in the regulatory landscape, employers can also explore the option of creating a 401(k) match that is linked to student loan repayment. Millennials and Gen Z are among those with the highest personal student loan debt, and they often identify the reduction of this debt as a key priority as they enter the workforce, Mattonelli says.

“That’s a great way to increase engagement and it also allows these participants and employees to not have to choose between paying off the debt or participating in savings for their retirement,” he adds.

Finally, Mattonelli encourages employers and advisers to think about technological developments and whether offering mobile apps or digital engagement platforms would increase participation.

“Giving participants the ability to enroll through a mobile app and being able to view account information and other financial wellness tools that are associated with the plan is important and will encourage participation from a younger employee base,” he said. “Integrating those features into the plan will be another vital area for employers and plan sponsors to really achieve greater participation from their younger employees.”

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