Generation Y Saving Aggressively for Retirement

According to Bank of America’s (BOA’s) new “Merrill Edge Report,” the mass affluent (consumers with $50,000 to $250,000 in investable assets) are making saving for retirement a top financial priority, despite the recession. From cutting back on luxuries to funding less of their children’s education, mass affluent are making significant trade-offs for a more secure financial future.

“Many mass affluent, particularly young investors, are focusing on their retirement goals by saving earlier and planning now for the lifestyle they want to live during their retirement years,” said Alok Prasad, head of Merrill Edge. “As markets continue to improve and the mass affluent invest optimistically for the future, they will seek tools and guidance that help them best pursue their long-term retirement goals.”

Since 2009, mass affluent Americans have weathered the financial crisis and its impact on retirement savings. These mass affluent, specifically young investors, are taking the lessons they learned during the downturn and applying them to their current financial situations. Affluent Generation Y (ages 18 to 34) has been saving aggressively, with an average $55,000 already saved for retirement. Young investors are also starting to save much earlier, with an average starting age of 22, while Baby Boomers started saving on average 13 years later at the age of 35.

Generation Y Planning Earlier  

The research found that in addition to saving more aggressively and earlier, Generation Y is also optimistic about their retirement savings potential. Today, they believe they will save on average nearly $2.5 million for their retirement, compared to those working mass affluent ages 51 to 64 who anticipate saving just $260,000.

The findings also indicate:

• More Generation Y respondents (77%) are planning to grow their retirement “nest egg” over the next 12 months;
• More than half of young respondents (57%) are investing more in the stock market this year, significantly more than those ages 51 to 64, 25% of whom will invest;
• Generation Y respondents are least likely to rely on government programs to fund their retirement, with 49% expecting to rely on the public sector to partially fund their retirement, compared to those much closer to retirement (ages 51 to 64), who are relying much more heavily on public sector programs (68%); and
• Generation Y prefers to utilize technology to manage their finances, with 54% valuing online tools such as budget calculators to help stay on track, compared to 28% of those ages 51 to 64. Additionally, 55% of Generation Y values the ability to manage their banking and investing accounts in one place.

“Young investors have grown to depend on technology as a way to communicate, entertain and now manage their financial lives,” said Prasad.

Not Ignoring Education 

While many mass affluent consider college to be worth the return on investment, parents are not compromising their retirement savings to pay for their child’s college education, according to the report.

There are still challenges though. Thirty-five percent of the mass affluent are concerned with the rising cost of college education. But even with record high tuition rates, 51% of mass affluent parents will or have saved just $20,000 or less for their child’s entire college education, while 17% of mass affluent parents did not or will not save for their child’s college education at all.

The mass affluent are continuing to struggle with balancing the cost of their children’s college while saving for retirement. While cutting back and making trade-offs is essential, just 22% of mass affluent parents who saved or are saving for college said they would cut back significantly on their retirement savings to pay for their child to go to college.

Of those married mass affluent with young children who are saving for college, more are willing to cut back significantly on family vacations (47%) or a new car (45%) to fund their children’s education, with just 31% saying they would cut back significantly on their retirement savings.

Alternatively, married mass affluent with young children are saving earlier with just 5% not having a college savings plan for their children, compared to nearly 19% of mass affluent overall.

Lifestyle Changes to Pay Down Debt 

Today, the mass affluent are optimistic about their financial futures. Fifty-five percent believe they will have less debt over the next 10 years, while 33% believe they will have the same amount. About 67% of those who believe they will have less debt 10 years from now plan to accomplish this by living a more frugal lifestyle.

Forty-six percent of retirees and preretirees that are retiring within five years have credit card debt. When asked how they would most likely spend an additional $1,000 per month, 45% of retirees said they would pay down debt such as a mortgage or a credit card.

Ketchum Global Research & Analytics and Braun Research conducted a phone survey in March 2013 on behalf of Merrill Edge. They contacted a nationally representative sample of 1,013 people in the United States with investable assets between $50,000 and $249,999, and oversampled 300 mass affluent in Texas (Dallas), California (Los Angeles, Orange County and San Francisco), New Jersey (northern) and Florida (southern).

Highlights of the report, as well as the full report, can be found here.