Data and Research

Early 20s Is Go Time for Retirement Saving

ADP marks National Save for Retirement Week by highlighting the power of stocking money away at your first job—and all your jobs after that.

By John Manganaro editors@plansponsor.com | October 23, 2015

Only about four in 10 (41%) U.S. employees ages 20 to 24 are currently saving for retirement, according to a new analysis from the ADP Research Institute.

“It's no mystery that as employees age, they take retirement planning more seriously,” explains Joe DeSilva, senior vice president and general manager for ADP Retirement Services. However, the research shows people tend to overestimate their ability to “play catch-up” and stick around in the workforce after age 60. Further, DeSilva says, playing catch-up “takes away employees' ability to capitalize on the power of compounding earnings to help their retirement savings grow.”

The study shows a more favorable 65.5% of employees ages 55 and older are contributing to a retirement plan or are otherwise regularly saving for the years after work, with varying degrees of success. ADP says this pattern of older workers saving more for retirement than younger workers continues to hold true from earlier research, and highlights the need for employers to refine their financial education strategies to ensure they are addressing the distinct priorities, needs and desires of each demographic within their workforce to encourage retirement planning.

ADP finds deferral rates also increased with age, with employees ages 20 to 24 years deferring on average only 4.6% of salary, while employees ages 55 and older deferring on average 8.5% of salary. “Additionally,” the analysis explains, “even as employees race to catch up and save more, average savings levels never approach the optimal double-digit savings rates that are recommended by financial experts.”

“We believe that providing plan participants with access to financial education throughout all stages of their career can help to reinforce the importance of retirement planning and increase their financial security,” De Silva adds.

NEXT: Tips for the generations

The ADP analysis shares specific tips for each generation currently in the workforce or retirement, as well as tips plan sponsors can use with today's multi-generational workforce.

For Baby Boomers, defined as those born between 1946 and 1964, ADP says there is absolutely no way to get around the need to save a significant portion of current income should one want a financially secure retirement. One specific tip: “Try living on your retirement income now. By putting away more of your pay for retirement savings, you can add to your nest egg while adjusting to your new income level in retirement … If you are age 50 or older, take advantage of catch-up contributions and review your asset allocation in your retirement plan account. Ensure your investments are appropriate for your age and risk tolerance.”

For Generation X, those born between 1965 and 1980, ADP says don't wait to reach the catch-up contribution age of 50 before saving up to the Internal Revenue Service (IRS) limits—which largely remain unchanged heading into 2016. “Save more now to take advantage of compounding earnings,” the analysis urges, and “maximize your savings during your prime earning years by choosing to automatically increase your retirement plan contribution every year.”

Another important piece of advice for Gen X: “Save for retirement first. You can borrow for your child's college education, and you can purchase long-term care insurance for elderly parents, but you cannot borrow for your retirement.”

For Millennials born after 1981, “don't wait to save until all your college loans are paid off,” ADP says. “Save now to take advantage of compound earnings. Establish good money management habits; focus on saving, smart budgeting and planning for emergencies.”

The full study is available here: “How Employers Can Extend Coverage andSimplify the Retirement Readiness Process.”

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