What’s (Really) Hindering Millennials’ Retirement Savings?

I’ve learned two things about Millennials over the years: first, that there are few things they find more bothersome than having Boomers tell them what they should be doing – and if there is anything more bothersome than the first, it’s being called “Millennials.”

Setting that aside, I was recently asked to participate in a forum focused on the challenges to retirement savings faced by Millennials. That event, “The Millennial Perspective: An Intergenerational Discussion on Retirement Savings,” was sponsored by Women for a Secure Retirement (WISER), centered on the organization’s iOme Challenge to develop a comprehensive proposal to address the challenges Millennials face in saving for retirement.

Of course, the definition of a Millennial has proven to be surprisingly elusive over time. But those in the forum were willing to accept the definition recently put forth by the Pew Research Center, that it would apply to those born between 1981 and 1996 – which, of course, means that the oldest in that demographic are hardly “kids” (aged 37 in 2018).

Retirement Roadblocks

My panel was tasked with discussing issues regarding financial education, savings and “retirement roadblocks” for this group. And indeed, there are a number of obstacles to savings generally, and retirement saving specifically, for this demographic. Specifically cited were:

Lack of “traditional” employment. This has manifested itself both in higher unemployment rates, and more in so-called 1099 employment in the “gig” economy. This can, of course, create an issue both in the income from which to save, and a…

Lack of access to retirement plan at work. This, of course is a significant hindrance. After all, we know that workers are significantly more likely to save if they have the opportunity to do so via a workplace retirement plan like a 401(k) – 12 times more likely, in fact. But even when they have access to a plan at work, they can still be hindered by a…

Lack of eligibility for a retirement plan at work. While a growing number of plans allow immediate eligibility for employee contributions (58.5%, according to the Plan Sponsor Council of America’s 60th Annual DC Survey), others don’t – and some plans still maintain a year’s wait. And that can be a problem when it comes to…

Job turnover. Millennials are widely regarded as job hoppers, and relative to their elders they may be – not so when their elders were younger. Going back to the end of the second World War, job tenure has been remarkably consistent – so yes, Millennials do change jobs, and while that doesn’t make them unusual, it can make it harder for them to save, particularly when there are…

Other priorities. Let’s face it, we talk about retirement saving as having an “accumulation” phase, but the early stages of most working careers is focused on a broader accumulation strategy – household goods, a car, a house, furniture, etc. And, for many those priorities also include paying down the debt that helped pave the way. Those obligations have, along with shorter job tenures, long been part of the earlier stages of our careers – and still are…certainly when it comes to thinking about…

Retirement. That’s right – retirement. Or more precisely the word itself, which conjures up images of a distant time and an “elder” you that – nifty little aging apps notwithstanding – isn’t something that most Millennials (or, arguably Boomers) have top of mind. In fact, our industry has long bemoaned the complexity of retirement as a savings goal – not only because it’s likely to be as variable as the individuals considering it, but also because it is so hard for an individual to picture, to imagine as a tangible goal. So, yes – we can, with a little effort – put a dollar figure on “retirement” – but juxtaposed next to that much-needed vehicle to get to work, that home with which to house a growing family, that college debt repayment… well, “retirement” is likely to be viewed more as abstract concept than tangible goal.

Perhaps a better way to think of this particular savings goal is to see it as the point at which you have financial resources sufficient to provide the freedom to pursue the avocation of your dreams, to work the hours you want (or don’t), from the location(s) you desire – or even the freedom to quit “working” altogether.

Janis Joplin once told their Boomer parents that “freedom is just another word for nothing left to lose.” But it seems to me that for Millennials, and perhaps for all of us, freedom – financial freedom – is “just” another word for everything to gain.

- Nevin E. Adams, JD
 
See also:

• Things That the ‘Common Wisdom’ About Millennials Gets Wrong
• 6 Things You Should Know About Those Millennial Participants
• So, How Much Should a 35-Year-Old Have Saved?

Feel Lucky?

One of my favorite cinematic quotes is from that Clint Eastwood classic, “Dirty Harry.”

It comes at the very beginning of the movie – there’s a bank robbery in process, and Clint Eastwood (in the personage of Inspector “Dirty” Harry Callahan) is trying to wolf down a hot dog when the commotion starts up. Harry, clearly irritated, gets up and heads out, and proceeds to shoot it out with the robbers, and then strolls over to the one who is still breathing, who has a shotgun within reach. Harry proceeds to point out the attributes of his .44 Magnum as he wonders aloud if he still has any bullets left, as the wounded robber contemplates his chances of getting to his shotgun before Harry pulls the trigger. At that point, Harry reminds him: “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”



When reading the various surveys of workers who seem confident about their retirement prospects – or don’t – when most haven’t even tried to figure out how much they will need – I can almost hear Harry Callahan in the background. They might not feel lucky, but they’re acting as though they will be.

Last week the nonpartisan Employee Benefit Research Institute (EBRI) published an Issue Brief highlighting some of the outcomes that EBRI’s Retirement Security Projection Model (RSPM) has projected in recent years. The RSPM was developed to help state governments figure out if their residents would run short of money in retirement – based on a concern that to the extent they did, the social safety net might have to be patched.

Now such models¹ must, of necessity, rely on certain assumptions, but unlike a number of other models out there, EBRI’s has a significant advantage – being able to draw on actual, anonymized administrative data of tens of millions of 401(k) participants for the retirement savings component, whereas others lean on self-reported samplings. Moreover, rather than rely on the extrapolation of measures like replacement rates, EBRI’s RSPM considers a household to “run short of money” or experience a retirement savings “shortfall” if it doesn’t have enough money to cover actual projected expenses in retirement – including an aspect that most models completely ignore: uncovered long-term care expenses from nursing homes and home health care.

Despite what I would consider to be pretty stringent assumptions on expenses, the RSPM projects that more than half — 57.4% — of all U.S. households (not just those covered by employer-sponsored retirement plans) will not run short of money in retirement. Oh, and that’s assuming that they come up with 100% of those expenses.

But what if you wanted to assume that, confronted with those expenses in retirement, individuals cut back on their spending – say to just 90% of the projected expenses? Well, even if you leave in place the full assumptions about nursing home and home health care costs, under that scenario the percentage of households projected to have sufficient retirement resources increases to more than two-thirds (68.1%). What if you assume that retirees only spend 80% of the cohort average for deterministic expenses? At that point, 82.1% would have enough financial resources. If you are willing to ignore the potential impact of long-term care costs, three-quarters (75.5%) of households will have sufficient financial resources in retirement to meet 100% of projected expenses.

That doesn’t mean that access to a retirement plan doesn’t matter. The report notes that among Gen Xers, those who have 20 or more years of future eligibility (including years in which employees are eligible but choose not to participate) are simulated to have a 72% probability of not running short of money in retirement. Those in that same group with no future years of eligibility are simulated to have only a 48% probability of not running short of money in retirement.

In fact, as you might expect, eligibility for a workplace retirement plan is one of the most – if not the most – important aspects that affect retirement success.

Now, as promising as those results seem, one shouldn’t draw too much comfort. Those who come up short will do so by varying amounts, and some by quite large amounts. Indeed, when you add up all those shortfalls, it amounts to $4.13 trillion in 2014 dollars.

And yet, applying what strike me as remarkably conservative retirement expense assumptions, and drawing from real-world actual administrative savings data, it seems that a good number of us can – assuming we keep doing what we are doing – anticipate a financially successful retirement.

Which brings us back to “Dirty Harry”: “Do you feel lucky? Well, do ya?”

If you are eligible for a retirement plan at work, the answer would seem to be – yes!

- Nevin E. Adams, JD

Two of the most commonly cited projection models are the Center for Retirement Research (CRR) at Boston College and the National Institute on Retirement Security (NIRS). Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier. ↩

(Re) Solving the Retirement Crisis

Several weeks back, I was invited to participate in a group conversation on retirement and the future.

The group of 15 (they’re listed at the end of the document that summarized the conclusions) that Politico pulled together was diverse, both in background and philosophies, and included academics, think tanks, advocacy groups, and the Hill. It was conducted under Chatham House rules, which means that while our comments might be shared, they wouldn’t be specifically attributed. That latter point was helpful to the openness of the discussion, where several individuals had opinions that they acknowledged wouldn’t be supported by the groups they represent.

The conversation touched on a wide range of topics, everything from the key challenges to the current system, the private sector’s role in addressing these problems, the individual’s role (and responsibility) for securing their own retirement, government’s role and the potential for current congressional proposals to have an impact.

In view of the diversity of the group – the complexity of the topics – and the 90-minute window of time we had to thrash things about – you might well expect that we didn’t get very far. And, at least in terms of new ideas, you’d be hard-pressed to say that we discussed anything that hadn’t come up somewhere, sometime, previously. But then, this was a group that – individually, anyway – has spent a lot of time thinking about the issues. And there were some new and interesting perspectives.

The Challenges

It seems that you can never have a discussion about the future of retirement without spending time bemoaning the past, specifically the move away from defined benefit plans, and this group was no exception. There remains in many circles a pervasive sense that the defined contribution system is inferior to the defined benefit approach – a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And while you can wrest an acknowledgement from those familiar with the data, almost no one talks about how few of even those covered by those DB plans put in the time to get their full pension.

Beyond that. there was a clear and consistent understanding in the group that health care costs and concerns were a big impediment to retirement savings, both on the part of employers and workers alike. People still make job decisions based on health care – on retirement plan designs, not so much. And when it comes to deciding whether to fund health care or retirement – well, health care wins hands down.

College debt was another impediment discussed. Oh, individuals have long graduated from college owing money – but never so many, and likely never so much (though you might be surprised what an inflation-adjusted figure from 20 years ago looks like). It is, for many, an enormous draw on current income – and one that has a due date that falls well before when retirement’s bill is presented for payment.

Women have a unique set of challenges. For many, the pay gap while they are working is exacerbated by the time out of the workplace raising children. They live longer, invest more conservatively, and ultimately bear higher health care costs – and increasingly find themselves in the role of caregiver, rather than bringing home a paycheck.

For many in the group, financial literacy still holds sway as a great hope to turn things around. There are plenty of individual examples of its impact, though the current research casts doubt on its widespread efficacy. Surely a basic understanding of key financial concepts couldn’t hurt (though don’t even get me started on the criteria that purports to establish “literacy”) – but it’s a solution that is surely at least a generation removed from the ability to have a widespread impact.

On a related note, the group was generally optimistic about the impact that the growing emphasis on financial wellness could have, both in terms of encouraging better behaviors, and a heightened awareness of key financial concepts. The involvement of employers, and employment-based programs seems likely to enhance the impact beyond financial literacy alone.

Resolving Recommendations

Ultimately, the group coalesced around four key recommendations:

The significance of Social Security in underpinning America’s retirement future – and the critical need to shore up the finances of that system sooner rather than later. The solution(s) here are simple; cut benefits (push back eligibility or means-testing) or raise FICA taxes. The mix, of course, is anything but simple politically – but time isn’t in our favor on a solution.

The formation of a national commission to study and recommend solutions. I’ll put myself in the “what harm could it do?” camp, particularly in that, to my recollection, nothing like this has been attempted since the Carter administration. We routinely chastise Americans for not taking the time to formulate a financial plan – perhaps it’s time we undertook that discipline for the system as a whole.

Requirements matter – but don’t call it a mandate. Since it’s been established that workers are much more likely to save for retirement if they have access to a plan at work (12 times as likely), but you’re concerned that not enough workers have access to a retirement savings plan at work, there was little doubt that a government mandate could make a big difference. There was even less doubt that a mandate would be a massive lift politically. And not much stomach in the group for going down that path at the present.

Expanded access to retirement accounts. While the group was hardly of one mind in terms of what kind of retirement account(s) this should be, there was a clear and energetic majority that agreed with the premise that expanding access is an, and perhaps the – integral component to “securing retirement” for future generations.

And maybe even this one.

- Nevin E. Adams, JD

p.s. I'm on the left, towards the top of the picture above.  Right next to Teresa Ghilarducci!

So, How Much Should a 35-Year-Old Have Saved?

You may have missed it, but there was a bit of a “twitter storm” regarding retirement last week.

More specifically, a relatively innocuous post about how much a 30-year-old should have saved toward retirement got a lot of 35-year-olds stirred up. The CBSMarketwatch article quoted Fidelity as saying that you should have a year’s worth of salary saved by the time you’re 30 – but the real point of controversy appears to have been driven by the premise that by the time you’re 35, you were supposed to have twice your salary saved.¹

The point, of course, is that it’s easier if you start early. But honestly, devoting 15% of your pay to retirement savings at any age is a daunting prospect, much less at a point when college debt and the prospects of a mortgage, kids and setting aside money for the kids’ college savings loom large. If this is “easy,” imagine what hard looks like!

I’ve been a consistent saver over my working career – never missed an opportunity to save in a workplace retirement plan, never worked for an employer that didn’t offer one, and always contributed at least enough to warrant the full employer match. And yet, I went a long time in my working career before I was able – having, among other expenses, law school debt, a mortgage, and three kids to help get through college – to set aside 15% for retirement (sadly, by the time I could afford to save at that level in my 401(k), the IRS “intervened”).

I don’t know how my 35-year-old self would have reacted to the article, or the twitter post, though I suspect I, like many of those who responded to the “tweet,” would have been a tad incredulous.

Ultimately, of course, the answer to how much you “should” set aside for retirement – regardless of your age – is largely dependent on what kind of retirement you plan to have, and when you plan to start having it. And, regardless of age, taking the time to do even a rough estimate on what you might need to quit working (or start retiring) is going to be time well spent.

Because while it’s possible to “catch up” later – it can be hazardous to count on it.

- Nevin E. Adams, JD

Footnote

Controversial as this premise clearly was to those in the targeted demographic, it’s really just math. To get there, Fidelity assumed that a individual starts saving a total of 15% of income every year starting at age 25, invests more than 50% of it in stocks on average over his or her lifetime, and retires at age 67, with an eye toward maintaining their preretirement lifestyle – but you might be surprised at what even these arguably aggressive goals produced in terms of a replacement ratio at age 67. ↩

Life's Lessons

Life has many lessons to teach us, some more painful than others – and some we’d just as soon be spared. But as graduates everywhere look ahead to the next chapter in their lives, it seems a good time to reflect on some of the lessons we’ve learned.

Here are some nuggets I’ve picked up along the way….

1. Be willing to take all the blame – and to share the credit.
2. There actually are stupid questions.
3. Shun those who are cruel – and don’t laugh at their “jokes.”
4. Never say you’ll never.
5. Be on time.
6. “Bad” people eventually get what’s coming to them. But you may not be there to see it.
7. Always sleep on big decisions.
8. Sometimes the grass looks greener because of the amount of fertilizer.
9. Never email in anger – or frustration. And be extra careful when using the “Reply All” button.
10. If your current boss doesn’t want to hear the truth, it may be time to look for a new one.
11. Never pass up a chance to say “thank you.”
12. If you wouldn’t want your mother to learn about it, don’t do it.
13. Never assume that your employer (or your boss) is looking out for your best interests.
14. Bad news doesn’t generally age well.
15. There can be a “bad” time even for good ideas.
16. Your work attitude often affects your career altitude.
17. When you don’t have an opinion, “what do you think?” is a good response. And sometimes even when you do.
18. You can be liked and respected.
19. Comments that begin “with all due respect” generally don’t include much.
20. Sometimes the questions are complicated, but the answer isn’t.

Remember as well that that 401(k) match isn’t really “free” money – but it won’t cost you a thing.
And don’t forget that you’ll want to plan for your future now – because retirement, like graduation, seems a long way off – until it isn’t.

Got some to add? Feel free to add in the comments.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD