At various stages of one’s life, priorities and challenges change. Retirement plan sponsors and advisers need to be aware of these challenges to help Baby Boomers, Millennials and Gen Xers overcome them so that they can save adequately for retirement.
“Ultimately, the bottom line is when you look at each one of these generations, they all have the same needs and goals,” says William Rose, senior vice president, wealth management, at UBS in New York. “They are just weighting them differently at different stages” of their lives.
Many Baby Boomers have not saved enough for retirement and, therefore, “are looking to extend their working lives and to transition to retirement at an older age,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies in Los Angeles. Plan sponsors and advisers should remind Boomers to “be proactive to be employable by maintaining good health, performing well at their current job and keeping their job skills up to date,” Collinson says.
Plan sponsors and advisers should also make sure that Boomers are aware of the additional $6,000 catch-up contribution they can make on top of the $18,500 limit if they are 50 or older, Collinson says. Baby Boomers should also revisit their asset allocations to be properly invested for their age and risk tolerance. “Financial advisers and plan sponsors are in a wonderful position to deliver those messages,” she says.
Robert Johnson, president and chief executive officer of The American College of Financial Services in Bryn Mawr, Pennsylvania, agrees that the proper asset allocation is critical for Baby Boomers, particularly within five years of retiring when they are in the “red zone.” “Take, for example, someone who retired at the end of 2008,” Johnson says. “If they were invested in the S&P 500, they would have seen their assets fall by 37% in one year. Just as a football team cannot afford to turn the ball over and fail to score points when inside the opponent’s 20-yard line, the retirement investor can’t afford a big downturn in the retirement red zone. This is what is referred to as sequences of returns risk. Taking risk off the table right before retirement is a prudent move.”
Related to sequences of returns risk is decumulation of assets. Advisers and plan sponsors need to help retiring Baby Boomers create a drawdown strategy, Collinson says. “Relatively few plan sponsors offer an annuity as a payout,” she says. “This is something for them to consider. If they are concerned about fiduciary liability, they can at least provide information about the types of retirement income strategies available and point participants in the right direction.”
Advisers and plan sponsors need to discuss health care and long-term care costs in retirement with Baby Boomers, which Boomers are not inclined to want to discuss, says Pat Murphy, president of John Hancock Retirement Plan Services in Boston.
Furthermore, “younger Boomers are not only preparing for retirement but caring for their aging parents,” Murphy says. “And older Boomers are taking on more of their grandchildren’s college debt, rather than have their children or grandchildren take on that debt.”
Generation X “are at an age when they are super busy,” Collinson says. “The critical mass are in their 40s and are likely to be raising kids, perhaps looking after aging parents and paying off credit card debt. They are more likely to have taken a loan from their retirement plan, and many are not saving enough. They are behind [on retirement savings] and need a wake-up call. Many of the things that financial advisers and plan sponsors can do [to help Generation X] are fundamental to retirement planning. Get them engaged by providing them with a calculator to estimate their needs. Do a gap analysis to set forth a plan to help them be in a better position to achieve their goals and get them to save more.”
Murphy agrees that being in their prime years, members of Generation X are juggling multiple priorities. Himself a Gen Xer, he says that he has two children in college and a mother in a nursing home.
Many Gen Xers also are not planning on a hard-stop retirement but, rather, to continue to work. “How does an employer think about a 70-year-old part-time worker, and how does an adviser help them find that work?” he asks.
And, just like working with Baby Boomers, sponsors and advisers need to address health care and long-term care costs in retirement, Murphy adds.
“A major consideration for Generation X and subsequent generations is the struggle between paying down college debt versus saving for retirement,” says John Geli, president of retirement solutions at DST in New York.
Advisers can help Gen Xers and Millennials analyze the interest rates they are paying on their college debt versus the potential growth and company match in their retirement plan, Collinson says. “Some forms of debt have a high interest rate,” she notes. On the other hand, “if an individual has student debt structured at a low interest rate, that gives them an opportunity to optimize how they think about saving while paying down debt.”
It may also be faulty thinking to include Social Security in the retirement planning of Gen Xers and Millennials, Collinson continues. “Social Security may look very different 30 or 40 years from now, and advisers and sponsors need to be very mindful of that when helping participants in their savings and retirement income planning,” she says.
Millennials’ biggest challenges is their risk aversion, Johnson says. Like the Silent Generation who experienced the Great Depression, Millennials “were shaped by the cataclysmic financial event of the financial crisis” of 2008, when they were just entering the workforce, Johnson says.
“[The] challenge here is helping Millennials’ overcome that risk aversion,” Murphy says. “Talk about market cycles. They have not seen that play out until recently. Maybe market forces will help them change their mindset.”
The second biggest challenge facing Millennials is undoubtedly longer life spans, says Tom Conlon, head of client relations at Betterment for Business in New York. “Scientists say that the first person to live to 150 years old may have already been born,” Conlon says. “This will impact how much [Millennials and future generations] will need in retirement. Will they need enough money to last 50 years? Combining this with rising medical costs, the potential for no Social Security and the decline of pension plans, Millennials may need to save more and retire later.”
When working with Millennials on retirement savings, advisers and plan sponsors need to ensure that they present them with a “personalized online experience because they have grown up in a world that has been almost entirely technology based,” Murphy says. “They expect us to know everything about them, and they do not want us to waste their time.”
When working with these various groups, it is important for advisers and sponsors to reach them “with targeted communications that speak to each of these segmented groups, rather than blanket communications,” Conlon says. “For Baby Boomers, make sure they are well prepared to handle medical costs in retirement. For Gen Xers, make sure they are saving more, and for Millennials, make sure they are engaging with the advice tools.”