Gen Y Saving Habits Threaten Retirement

December 10, 2010

This article is included in these additional categories:

Analytics, Automated & MarTech | Data-driven | Financial Services | Regulatory | Staffing | Youth & Gen X

Generation Y workers (those ages 18 to 30) may be most at risk in trying to save enough money for retirement despite having the most time to do so, according to a new study from HR consulting firm Aon Hewitt.

Average Gen Y Worker on Track to Save 2/3 of Needed Money

Due to lack of participation in defined contribution plans, low savings rates and high rates of cashouts, Aon Hewitt analysis indicates eight in 10 Generation Y workers will not meet all of their financial needs in retirement unless they significantly improve their saving and investing behaviors.

After factoring in inflation and post-retirement medical costs, Aon Hewitt projects Generation Y workers will need to save 18.7 times their final pay in retirement resources: including Social Security, employer-provided defined benefit and defined contribution plans and employee savings; to maintain their current standard of living in retirement (this assumes retiring at age 65; more will be needed to retire earlier).

Yet Aon Hewitt’s research shows that employees of this generation who work a full career are on track to accumulate just 12.4 times their final pay, leaving a shortfall of 6.3 times pay, a third of their total needs.

Gen Y Saving Habits Cause Problem

One factor in particular plays a significant role for Generation Y: employees’ saving and investing habits. Aon Hewitt’s analysis shows that only half of Generation Y workers who are eligible to participate in a defined contribution plan do so, meaning they have accumulated very little savings, if anything, in their plan. Among those who do save, the average before-tax contribution rate is only 5.3%of pay, with 41% of workers not saving enough to receive the entire employer-provided match.

Even if workers begin saving early, Aon Hewitt’s research shows that most cash out their savings well before retirement. Nearly 60% of Generation Y workers cash out their retirement savings when changing jobs, which means they are missing out on the opportunity for decades-worth of tax-deferred growth on their investments.

In comparison, 71% of Generation X (age 31-45) and 76% of Younger Boomers (age 46-54) eligible to participate in a defined contribution plan do so. They contribute at higher average rates (6.8% and 8.4%), and cash out when changing jobs at lower rates (45.8% and 36.9%).

Automation Gives Gen Y Some Advantages

Aon Hewitt analysis indicates automation is playing a strong role in helping employees save across all demographics, but especially with younger generations. Participation rates of Generation Y workers who were automatically enrolled were 85% in 2009, compared to just 42% under traditional enrollment.

Gen Y Takes Advantage of Simplified Investment

In another positive signal for younger investors, Generation Y workers were also more likely to use contribution escalation features, which enable participants to increase their contribution levels over time. For example, nearly a quarter of Generation Y workers elected or were defaulted into contribution escalation when available in their employer’s defined contribution plan, compared to just 10% of Younger Baby Boomers.

In addition, Aon Hewitt’s data shows that Generation Y participants use simplified investment solutions more often and are more likely to use them correctly. This is primarily because of the growing popularity of premixed portfolios as the default investment under automatic enrollment. More than two-thirds (69%) of Generation Y investors used a premixed portfolio (mainly target-date funds) in 2009, compared to 54% for Generation X investors and 45% of Younger Boomers.

Furthermore, nearly 60% of Generation Y workers holding a premixed portfolio used it as a turnkey solution, meaning they invested 100% of their assets in the fund, compared to 40% of Generation X workers. This is a vast improvement from past years prior to automation, when younger generations tended to over-use conservative investments such as stable value funds.

Fees, Charges Influence Investor Satisfaction

The importance of trading fees and charges on overall investor satisfaction has increased from 2009, according to the J.D. Power and Associates 2010 US Self-Directed Investor Satisfaction Study. The study finds that trading charges and fees account for 23% of overall investor satisfaction, up from 17% in 2009, after six years of decreasing importance.

Trading charges and fees is the second-most-important factor driving overall satisfaction, following interaction. Among investors with high levels of satisfaction (850 or higher on a 1,000-point scale), 75% say they “definitely will” recommend the firm.

45th Parallel Design Ad

Explore More Charts.

Pin It on Pinterest

Share This