Data & Research June 28, 2013

For Gen Z, 28 Is the Magic Number

On average, members of Gen Z expect to be living on their own by age 21, according to the 2nd Annual Generation Z Survey, released by TD Ameritrade Holding Corporation.
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However, 63% say they feel welcome to move back in with their parents in the future if they cannot afford to swing it on their own. This young generation appears to have no qualms about moving back home, either. In fact, many see some benefits to living with their parents. Eighty-one percent of those currently living at home after college or planning to do so say it allows them to save money, while nearly half (48%) say it allows them to be selective about employment opportunities.  

But parents, fear not. Gen Z does not plan to live at home forever. When asked at what age they would be embarrassed to still be living at home, Gen Z, on average, said age 28. Nearly nine out of 10 (88%) would be embarrassed to still be living at home at 30, and half (49%) would be embarrassed to still be living at home at age 25.    

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Not only do they hope to be independent and living on their own by age 28, but it is also the age members of Gen Z, on average, plan to start saving for retirement. Thirty-nine percent of those in Gen Z worry they will not be able to count on Social Security or other government retirement programs when they get older (31% in 2012), and 31% of those in Gen Z are concerned about not being able to put money away for retirement.   

When it comes to the life path they plan to take, those in Gen Z expect major milestones will occur in this order:    

1. Start a job. 

2. Buy a car. 

3. Pay off student debt. 

4. Get married. 

5. Buy a home. 

6. Start saving for retirement. 

7. Have children.  

  

“It’s interesting to see that this young generation plans to take a fairly traditional path to their futures, however; the one piece that looks out of place is saving for retirement,” says Carrie Braxdale, managing director, investor services TD Ameritrade, Inc. “Time and time again we hear Baby Boomers say they wish they would have started saving earlier, and the hope is that we can spread the word to Gen Z to start saving as soon as they start working, rather than waiting until they reach other milestones. Even a little bit can go a long way, and the power of compounding interest is an opportunity they do not want to miss out on.”
Data & Research June 28, 2013

Is DB or DC Better for Participants?

There are many factors that contribute to how much retirement income a plan will generate, according to a new analysis.
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The Employee Benefit Research Institute (EBRI) said a multitude of factors affect the ultimate outcome for retirement plan participants such as: interest rates and investment returns; the level and length of participation; an individual’s age, job tenure, and remaining length of time in the work force; and the purchase price of an annuity.

“If historical rates of return are assumed, as well as annuity purchase prices reflecting average bond rates over the last 27 years, and real-life job tenure experience, EBRI’s modeling results show a strong advantage for voluntary-enrollment 401(k) plans over both the final-average defined benefit (DB) plans and cash balance plans,” said Jack VanDerhei, EBRI research director and author of the study.

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“However, when subjected to various ‘stress tests’ by reducing the rate of return assumptions by 200 basis points and increasing the annuity purchase price to reflect today’s bond rates, results show that in many cases the voluntary-enrollment 401(k) plans lose their comparative advantage to the final-average DB plans (at least at the median) for lower-paid employees, though voluntary-enrollment 401(k) plans’ median advantages over the stylized cash balance plans remain in force.”

The baseline analysis uses the median level of employer generosity for both final average DB plans and cash balance plans, but when the simulations are re-run with more generous provisions for the DB plans, the relative advantages of the 401(k) plan decrease.

EBRI used its Retirement Security Projection Model to provide a direct comparison of the likely benefits under specific types of defined contribution (DC) 401(k)-type plans and DB retirement plans. The DC plans modeled in the analysis represent voluntary-enrollment 401(k) plans, while the DB plans are represented by two stylized plans: a high-three-year, final-average defined benefit plan and a cash balance plan.

VanDerhei said one additional factor that that should be taken into account when comparing the two different types of plans is that workers often contribute to 401(k) accounts, unlike traditional DB pensions, which in the private sector are typically funded exclusively by the employer. He noted this particular research did not consider the impact of automatic-enrollment 401(k)s.

Full results of the study have been published in the June EBRI Issue Brief under "Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrolment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans," available here.

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