The retirements of the three generations currently represented in the workforce—baby boomers, generation X, and millennials—will become more different as the pension landscape evolves, according to a survey.
The 15th Annual Transamerica Retirement Survey finds that American boomers were already mid-career when the retirement landscape shifted from DB to DC plans. And they haven’t had a full 40-year time horizon to save in 401(k)s and experience the full effects of long-term compounding of their investments.
“Many baby boomers were hit hard during the Great Recession and, unlike younger generations, they have less time to financially recover before they retire,” says Catherine Collinson, president of Transamerica Center for Retirement Studies (TCRS).
TCRS found boomers to have total household retirement savings of US$127,000 (estimated median), an increase from US$75,000 in 2007. However, she notes that’s not enough to meet the retirement needs for many.
This savings shortfall helps to explain the sharp increase in boomers who expect to rely on Social Security as their primary form of income when they retire—now 36%, up from 26% in 2007.
Sixty-five percent of boomers plan to work past age 65 or do not plan to retire—and most (52%) expect to continue working, at least on a part-time basis (42%), when they retire. Only 21% plan to immediately stop working when they retire. Most of those who plan to continue working say it’s for reasons of income or health benefits.
The DC generation
Generation X entered the workforce in the mid- to late- 1980s just as 401(k)s were being implemented and DB plans were beginning to disappear. It’s the first generation to have access to 401(k)s for most of their working careers.
Unfortunately, that generation has been more likely than other generations to take advantage of 401(k) features such as loans and early withdrawals, which when initially introduced were thought to encourage plan participation, but are now also viewed as a double-edged sword which can stifle the long-term growth of retirement nest eggs. Twenty-seven percent of current 401(k) participants have taken a loan and/or early withdrawal.
Gen X workers estimate that they will need to save US$1 million to retire with a comfortable lifestyle, which reveals a profound gap compared to what they have saved to date.
The average total household retirement savings for gen X is US$70,000, an increase from US$32,000 reported in 2007. This savings gap helps explain why 54% plan to work past age 65 or do not plan to retire.
“Generation X will begin turning 50 next year, a loud wake-up call for them to get laser-focused on planning, saving, and investing for retirement,” Collinson warns. “Their clock is ticking but they still have time to substantially improve their retirement prospects.”
The saving generation
Millennials have lofty aspirations about their future retirement. The majority (60%) plan to retire either before or at age 65. Most plan to continue working when they retire, with many intending to do so for enjoyment.
“Millennials are a digital do-it-yourself generation of super savers,” Collinson says. “They’ve heard and responded to the message they need to start early and save as much as possible.”
The survey found that 70% of millennials are already saving for retirement and started, on average, at age 22.
Two out of three millennials expect to self-fund their retirement through retirement accounts or other types of savings and investments. Among millennials who are offered a 401(k) or similar plan, 71% are participating in the plan and participants contribute an average of 8% of their annual salary.
Even more impressive, among millennials currently participating in their plan whose employer offers a matching contribution to the plan, the salary contribution rate increases to an average of 10%.
Hungry for more education, 73% say they would like more information and advice from their employers on how to achieve their retirement goals.
“Millennials take their retirement benefits very seriously,” Collinson adds. “Our research found that two out of three millennials say they would likely switch employers for a similar job that offered better retirement benefits.”
Related articles: