Wake Up Call: Helping Young People Grapple with Retirement

Merrill Lynch hosted a Webcast this week called, “It’s Your Future: What Young Americans Need to Know About Retirement,” hosted by former ABC News anchor, Charles Gibson.  

Gibson was joined by a panel of four experts including: Andrew Sieg, Head of Retirement Services at Bank of America Merrill Lynch; Roland Fryer, Professor of Economics and CEO of The Education Innovation Laboratory at Harvard University; Anya Kamenetz, author of Generation Debt and DIY U and staff writer at Fast Company; and John Pelletier, Director of the Center for Financial Literacy, Champlain College.  The group discussed the social and economic challenges facing people in their 20s, 30s, and 40s, specifically in terms of retirement.

The clearest message all panelists repeated several times throughout the discussion is that young people need to take advantage of time; in terms of their years in the workforce and the number of years their investments have to grow.

But how do you get this seemingly obvious message across to someone in their 20s, asked Gibson?  The answer lies in financial literacy, which this country lacks tremendously, Pelletier said. He defined financial literacy as “being taught the skills you need for a lifetime of financial wellbeing.” This may sound like it should be of paramount importance, but only four states mandate a personal finance course before graduating high school, he said.   

The reason for this lack of financial education in schools is two-fold, Pelletier said. As a result of the “No Child Left Behind” act, any topic that is not part of a standardized test is very difficult to squeeze into a curriculum. Also, Pelletier cited a survey from 2009 that found more than two-thirds of teachers do not feel comfortable teaching such matters as how mortgages work, interest compounding, or investment diversification–some key elements of financial literacy.

In the Webcast, a short montage of college students was played, in which they talked about their view of retirement; many of them said they know it’s important, but won’t think about it for years to come. At which point, Seig entered the conversation by saying maybe the most troubling thing these young people were saying was how they still envisioned retirement as their parents or grandparents do. He said if we don’t teach them the realities of what their retirement will look like, we will be doing them a disservice.

Gibson questioned if that would confuse them even more–not only do they not know how critical it is to start saving as early as possible, but now we’re not even sure what their retirement will look like. Seig said it may be jarring for them to hear, but it’s the truth and the sooner they accept that, the sooner they can start to prepare for whatever it is lies down the road.

Seig described the probable “non-traditional retirement” young people will have. It will involve moving in and out of the workforce for perhaps 30 to 40 years, and will require them to have flexible skills. It will not be 10-15 years of a sedentary life in Florida, he asserted.

As for these skills, the panelists discussed at length two kinds of investments young people should pay attention to–those involving the markets, and those they make in themselves. Most of the panelists said higher education is a positive investment decision that will help to ensure a young person’s ability to move around within a volatile workforce. The youngest panelist, Anya Kamenetz, said before jumping into a graduate program, young people would gain more by working first, and even questioned the value of graduate degrees at all (considering the expense).

And despite trying to keep an optimistic outlook for the future of young people, there was one theme that kept cropping up–young people are simply not saving enough.  Pelletier said 60% of young people do not roll their 401(k)s from one relatively short-term job (average three years) to the next, instead deciding to take the distribution. And about 50% of 20-something with a 401(k) plan at work aren’t participating, he said.   

Gibson asked what strategy parents should take when trying to talk to their kids about money. Seig outlined a simple five-step approach. First, get the issue out of the shadows (Gibson joked how surveys show more parents talk to their kids about sex than about money). Second, if possible, pay off debt–it is the equivalent of saving, he said. Third, if you have a job, make sure you’re taking advantage of workplace savings programs. Fourth, think about “human capital,” such disability insurance or higher education. And last, communicate multi-generationally. Parents should talk about what they envision for their future, as well as for their children’s, and how the two generations will work together.

Seig wanted to drive home the point that financial literacy should be common-sense oriented.  Such simple lessons as “spend less than you make” and “don’t keep all your eggs in one basket” are not rocket science.  And look at it positively; financial literacy can be empowering, he said.