Retirement
across generations

The journey to retirement looks different for everyone especially when comparing across different generations. Gen X is looking to retire at a later age, while Gen Z is looking to retire sooner. Millennials fall in the middle but show keen interest in being more proactive when it comes to personalizing their retirement plans. The reality is that there is a huge misconception regarding retirement and where income is going to come from to last through retirement. Each generation has different expectations from their employers when it comes to plan offerings and employee assistance. Combating retirement misinformation is crucial when preparing employees for a journey through their careers and into retirement.

Retirement perceptions among different employees

When it comes to working with younger employees, those just starting in their careers fresh out of college through to those who are approaching their 30s, there are numerous concerns that workers have requiring different communication and priorities from a plan sponsor. Many employees at the beginning stages of their career are not thinking about retirement – it is as far away as possible within a working career, and other priorities are at the forefront of their minds. Whatever the priority may be, namely establishing financial independence, paying off student debt, or enjoying the independence that comes with living a life outside of the confines of college or home, it is the role of an employer to help meet those goals and encourage retirement saving.

Nuveen has commissioned Economist Impact to conduct research into the future of corporate benefits. The study covers a range of benefits, including retirement programs, health insurance, life/disability insurance, paid time off, wellness, family support (e.g., parental leave, childcare, elderly care and family planning) and education and training.⁷ Across the survey, 25% of respondents ranked retirement benefits as their top priority with health/life/ disability insurance following as a close second at just over 20%. However, the data becomes revealing once we drill into the various demographics of respondents. For example, only 2% of Gen Z ranked retirement benefits their top priority. The data shifts as age increases: 16% of millennials rank retirement benefits as their top priority, and 53% of Gen X and baby boomers rank it as their top choice. With such drastic differences just on the simplest measure, the age of the participant, we can already see the challenges that a company faces when constructing benefits packages and balancing needs across the generations.

Mismatch in savings vs expectations

A new national poll from Public First, commissioned by BPC’s American Savings Education Council (ASEC) discovered a striking mismatch between the income sources workers expect to rely on in retirement and the sources of income current retirees report.⁸ The report notes 49% of non-retired respondents expect Social Security to be a major source of income during retirement, compared to 82% of those already retired reporting that it is not. To further this, the Social Security trust is set to be depleted by 2033 without action from Congress, potentially leading to a cut in the benefits received by all retirees.⁹

When Gen Z, Millennials, Gen X and Baby boomers were asked their views on emergency savings, financial planning and advice services, and retirement strategy education and insights, they ranked them differently. Gen Z and Millennials rank emergency savings as their top priority while Gen X leans toward valuing professional planning and advice services. Baby boomers did not value either as much, seeing as 46% of those surveyed were in favor of guaranteed1 retirement income options from their employers. Regardless of generation, 76% of Americans believe it is important to save and only 39% have a plan in place. So, what is the takeaway? Employers should offer a combination of these benefits to ensure that each generation feels heard when voicing their retirement priorities and concerns. Further, as employees near retirement they seem to see increasing value in guaranteed income sources to supplement their Social Security. This is where an embedded lifetime income option within a default plan can educate employees earlier in their careers on the need for diversified income sources, but also help them build that asset base for when they near retirement.

15% a year and target compounding

Regardless of how an individual may rank these attributes, it is clear that saving is important to everyone in some capacity. So how much should your employees be saving? Previously financial experts have recommended saving 10% for retirement, however 15% is a more plausible goal with the cost of retirement steadily rising.¹⁰ A consistent savings rate also has the advantage of helping to insulate participants from market volatility. By steadily contributing, a participant essentially evens out some market volatility by buying regardless of market environment. The underlying asset allocation within a target date fund investment is then outsourced to the asset manager, meaning that the participant doesn’t need to pay as much careful attention to the different value propositions offered by individual asset classes.

As age increases, medical expenses become more prevalent and can range from typical yearly health expenses to assisted living, not to mention the multitude of hardships individuals can encounter later in life. The rising cost of medical care has led to a rise in the popularity of Health Savings Accounts (HSAs). HSAs have risen in popularity due to the benefits they offer, the first being they are tax advantaged savings accounts that allow for tax-free withdrawals, as long as they are used for qualifying expenses. To be eligible, participants must be enrolled in a high deductible health plan. While these savings should only be used for qualifying medical expenses, if the account holder needs the money before the age of 65, they must pay income taxes on the withdrawal plus an additional 20% tax penalty. This is another form of long-form saving that an employer can offer, again helping employees build those nest eggs.

Automation and lifetime income

Many companies offer automatic enrollment plans to motivate participants to contribute to their retirement plans, and rule changes in the SECURE 2.0 Act make auto-enrollment mandatory for new plans. These automatic provisions get the employee into the plan and help them see the benefits of compounding. This is especially important for younger employees who are otherwise focused on other financial goals. The choice of default for a plan also has an impact at this point, as there are more target date funds available that include an allocation to an annuity product within them. These funds can help educate employees on the benefits of a guaranteed income stream once they hit retirement much earlier in their careers. By allocating to these additional income streams throughout a career it can help employees see where that additional income is going to come from. This builds trust and knowledge of diversified income sources while maintaining relatively simple allocation decisions for the individual worker. This helps those with other financial priorities, i.e., younger workers to still build toward that more optimal allocation.

The integration of lifetime income solutions within plan default investments, such as a target date, again further outsources some initial responsibility away from the individual participant and toward the plan sponsor and asset manager. This additional complexity comes with a need for education, but it can help create a more comprehensive retirement strategy. New rules also allow for student loan repayments being made by the employee to be matched as though they were going into the 401(k), allowing younger employees who might be focused on paying down student loan debt to still build up a retirement account.

As an employer, it is important to analyze and have a deep understanding of the various guaranteed lifetime income solutions that are available. Helping an employee understand their monthly expenses and how to supplement Social Security with lifetime income is a crucial next step on their retirement journey.

Financial calculators

Encouraging the use of financial calculators for your employees can help you keep them on track. These calculators allow your employees to determine plausible investments in relation to their desired outcome.

Income calculators are one tool that give insight into your financial outlook. This takes taxes, deductions, and other earning into consideration, helping your employees make educated decisions as to whether they need to change their contributions or save more. Financial calculators work especially well for those further along in their careers who have a clearer picture after a decade or two of saving, to see whether their current rate of saving is sufficient to allow them to retire on time and with the income they wish to receive. However, these can also be useful for younger employees as well, for example those who may be looking to make a big life choice such as buying a first property or starting a family. With bigger expenses coming up they can use calculators to analyze the liquidity of their assets and make decisions as to retirement savings or other investments.

The Social Security Administration also has a calculator available. It calculates the primary insurance amount based on the average indexed monthly earnings. Not only does the calculator fluctuate for inflation, but it is also based on your highest 35 years of earning.¹¹ This calculator can help your employees project their SSA and determine the next stage in their savings.

Conclusion

Many Americans feel underprepared for retirement, and this feeling will not dissipate until employers help educate and provide confidence that the employee has access to sound retirement plans. Financial stability throughout retirement is the goal. Employers should look to the construct a plan that serves the majority and helps to put employees on the right path to retirement. Offering incentives such as employer match and HSAs are a start. The closer employees get to retirement, the more important it is for employers to provide the necessary tools to aid financial certainty. Regardless of plan construction, in today’s world of market volatility and contentious inflation, it is imperative to encourage employees to start early and think about their lifetime income goals.