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?

"Working" It Out

It is routinely reported that 10,000 Baby Boomers are retiring every day, and yet surveys continue to indicate that Americans plan to postpone retirement.

This raises the question: are more older Americans working?

A recent Wall Street Journal article notes (subscription required) that one of the biggest changes in the U.S. labor market over the past two decades has been the increasing number of people working over the age of 55. As recently as 1993, only 29% of people that age were in the labor force, but by 2012 more than 41% of that age group were still in the labor force, the highest since the early 1960s.

It’s hard to find a workplace survey these days that doesn’t find workers planning to work past the traditional retirement age of 65. For example, a recent survey by the Federal Reserve found that fewer than one in five workers age 55 to 64 planned to follow the traditional retirement model of working full time until a set date and then stop working altogether.

A recent report by the Employee Benefit Research Institute (EBRI) noted that the percentage of civilian, noninstitutionalized Americans near or at retirement age (age 55 or older) in the labor force declined from 34.7% in 1975 to 29.4% in 1993. However, since then the overall labor-force participation rate of this group has increased steadily, reaching 40.5% in 2012 — the highest level over the 1975-2013 period — before decreasing to 40.3% in 2013.

Venus and Mars?
The labor-force participation rate for men ages 55 and older followed the same pattern through 2010, falling from 49.4% in 1975 to 37.7% in 1993 before increasing to 46.4% in 2010, roughly where it stood in 2013. On the other hand, the labor-force participation rate of women in this age group was essentially flat from 1975 to 1993 (23.1% and 22.8%, respectively). But after 1993, the women’s rate also increased, reaching its highest level in 2010 (35.1%), where it remained though 2013.

The increase in labor-force participation for the age groups below age 65 was primarily driven by the increases in female labor-force participation rates, as the male labor-force participation rates of those ages 55-59 and 60-64 were lower in 2013 than they were in 1975. In contrast, female labor-force participation rates for those ages 55-59 and 60-64 increased sharply from 1975 to 2013, despite some leveling off in 2010-2013.

The Journal article draws on some Department of Labor data that show that while there are fewer men working at every age, at any given age, more men were working in 2013 than in 2000. By way of example, the article notes that at the turn of the century, about 66% of 60-year-old men and 20% of 70-year-old men were still in the labor force — participation rates that stand today at 72% and 25%, respectively.

So, while there are clearly more people retiring, and thus more not working, there also appear to be more older individuals (on a percentage of workforce basis) working today — though perhaps not as many as once thought they might.

Safety "Net"

I’m one of those travelers who absolutely dreads cutting it to the last minute. Not that I haven’t been forced to do so, from time to time, but I’m generally the one chomping at the bit to get to the airport, or to hit the highway an hour before anyone else. In my defense, on more than one occasion that “cushion” has been the difference between catching a flight or not. Planning that only considers a “best” or “normal” scenario too often overlooks the unexpected—and sometimes that margin of error is all you have.

For over a decade EBRI has modeled the nation’s potential retirement savings shortfall, and the EBRI Retirement Readiness Ratings™ provide an assessment of how many Americans are at risk of running short of money for needed expenses in retirement. In contemplating expenses, that model considers the regular expenses of living in retirement, as well as uninsured medical expenses, and the potential costs of nursing home care.

However, we have also documented and quantified the role of Social Security, defined benefit and private retirement accounts on retirement income adequacy for Baby Boomers and Gen Xers with an eye toward replacing their preretirement wages and income. While this more traditional focus on income replacement may misstate an individual’s actual post-retirement financial situation, many financial planners work with this goal as a starting point, and it can provide valuable insights particularly when—as is the case with EBRI’s projections—it is able to leverage actual 401(k) data from the unique EBRI/ICI 401(k) database, the largest such repository in the world.

Indeed, based on a recent EBRI analysis, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with current levels of Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis.

When the threshold for a financially successful retirement is increased to 70 percent replacement of age-64 income, 73–76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent of the lowest-income quartile will still meet the threshold; however the percentage of those in the highest-income quartile deemed to be “successful” relying on just these two retirement components slips to 59 percent, reflecting the progressive nature of Social Security.

As positive a result as that seems for many, when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1 percent automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88–94 percent at a 60 percent threshold; 81–90 percent at a 70 percent replacement threshold; and 73–85 percent at an 80 percent threshold.

That’s not quite the doomsday crisis scenario portrayed by many of the headlines in vogue today, though EBRI’s projections still show that a large number of Americans—even among those eligible for a 401(k) plan for 30 years—won’t be able to replace that pre-65 salary even at the various levels modeled, based on current savings patterns.

It does, however, illustrate the impact that changes in those current savings behaviors can have—and it underscores the significant role of Social Security as a vital safety net for the nation’s retirement security.

Nevin E. Adams, JD

“The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis” is available online here.

“Half” Baked?

I’ve never been much good in the kitchen.  I’ve neither the patience/discipline to follow most recipes, nor the innate sense for the right balance of ingredients that those with culinary talent seem to have.  That said, I learned the hard way years ago that if you mix the right items in the wrong order, or the wrong amounts of the right items, leave something to bake too long – or not long enough – the results can be disastrous.

A recent report by the Pew Charitable Trusts posed the question, “Are Americans Prepared for Their Golden Years?”  Perhaps not surprisingly, the report indicated that many are not.  What was surprising, however,  was the assertion that Gen-Xers (those born between 1966 and 1975), in the Pew analysis, looked to be in even worse shape than either early or late Boomers.

Previous EBRI research has found that approximately 44 percent of simulated lifepaths for Baby Boomer and Gen-Xer households are projected to run short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted.  However, that includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.  Looking specifically at Gen X, many of which have decades of saving accumulations still ahead of them, nearly one-half (49.1 percent) of the simulated lifepaths of that demographic are projected to have retirement resources that are at least 20 percent more than is simulated to be needed, while approximately one-third (31.4 percent) are projected to have between 80 percent and120 percent of the financial resources necessary to cover retirement expenses and uninsured health care costs (see Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model).

However, in reviewing the Pew report and its associated methodology, several key differences in approach emerge.  On the one hand, the Pew report assumes that workers will receive credit for a full career in the accrual of Social Security benefits, and it also imputes a full-career accrual of defined benefit pension benefits – though many individuals don’t wait till full retirement age to collect on the former (accepting lower benefits), and many don’t accumulate enough service to be entitled to the latter (see “The Good Old Days”, “Employee Tenure Trends, 1983–2012“).  This assumption likely exaggerates the retirement readiness of older workers, who are more likely to have some defined benefit accrual.

On the other hand, the Pew report appears to assume no further contributions, either by employer or employee, to the defined contribution balances as of 2010.  That’s right, no further contributions beyond the self-reported participant balances of 2010, and no earnings projection on those assumed non-existent contributions, either.  This assumption likely serves to understate the future retirement readiness of younger workers, who have years, and in many cases decades, of savings ahead of them.

Based on the combination of those assumptions and the well-documented trend away from defined benefit plans and toward a greater reliance on defined contribution designs, it’s little wonder that the Pew report concludes that Gen Xers will be worse off than Boomers.

In sum, whether you’re baking a cake or evaluating research conclusions, if it seems a bit “off,” it’s generally a good idea to carefully review the recipe – and double check the ingredients.

Nevin E. Adams, JD

The Pew Charitable Trusts report, “Retirement Security Across Generations” is available online here.