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 Services.
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 income sources.
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.