Improving Retirement Readiness for Gens X and Y

April 19, 2013 ( – With the decline in defined benefit and retiree health care plan offerings, the younger generations need to take more responsibility for their retirement savings.

Planning requires a number of different decisions: how to save, when to start, how much to save, what savings vehicle to use, how to invest and how to convert assets into a sustainable retirement income, said Allison Salka, Ph.D., corporate vice president and director of LIMRA Retirement Research, during a webcast sponsored by LIMRA. “This is a lot of responsibility for Gens X and Y when retirement is far off and they have other pressing needs,” she added.  

LIMRA’s own research revealed fewer than half (46%) of Generation X consumers surveyed selected retirement as the most important reason to save, and a larger proportion of Generation Y consumers ranked saving for vacation or travel (41%) over retirement (31%) as the most important reason to save (see “Gens X and Y Need to Make Retirement Savings a Priority”). In addition, more than half of Generation X and Generation Y consumers admit having little or no knowledge about investments and financial products (see “Gen X and Gen Y Uninformed About Investments”).  

One way to help these generations, ages 20 to 31 (Gen Y) and ages 32 to 47 (Gen X), prepare for a financially secure retirement is to improve their financial knowledge. But, not every person has the same level of interest and ability concerning finances, Salka noted. There are differences between Gen X and Gen Y to consider. Gen X has more financial and non-financial assets than Gen Y, plus they are more likely to be married, so they have a financial partner. However, they also tend to have more debt. “The goal is not necessarily to create investment gurus, but to help create savers who understand why they are saving and who have a plan,” Salka said.

Generations X and Y should have help. In LIMRA’s research, members of bother generations who work with financial advisers are more likely to say they are knowledgeable about investing and products. Salka pointed out that nearly half (47%) of Gen Y have little or no tolerance for investment risk, however, they are in the life stage where it is better to invest more aggressively. Both younger generations are more likely focused on basic financial needsnot retirement planning. However, she noted, 78% of those who work with a financial adviser are contributing to a retirement plan or individual retirement account (IRA); 61% are saving more than 7% of salary versus 38% of those without an adviser. In addition, 71% of those working with an adviser expressed confidence in their retirement savings versus 43% not working with an adviser. 

Plan participation is important. According to LIMRA’s research, among Gen X and Gen Y consumers with access to a defined contribution (DC) plan through their employer, those who have never made contributions are more likely to feel less knowledgeable about investments and financial products than those currently contributing to their DC plan. Salka said automatic enrollment has helped increase plan participation by the younger generations and recommends employers use re-enrollment for all employees.  

Making sure savings increase over time will also help the younger generations to be more prepared for a secure retirement. One in three members of Gen Y have their DC plan investment mix automatically selected for them, which Salka said speaks to the impact of automation. However, although probably automatically enrolled, they are saving at the default rate, so automatic deferral increases could help. She noted that the median deferral rate for both Gen X and Gen Y is 6%, despite the fact Gen X has spent a longer time in DC plans. Individuals should bump up savings as they get older.  

Finally, to keep members of the younger generations’ eyes on the goal and keep them saving, withdrawals from retirement plans should be discouraged. This leads back to financial education. Salka said nearly 25% of participants in 401(k) plans take money out of their plans, and 75% of workers that cash-out their entire balance indicate they do so because they face basic money management challenges.  

Addressing these generations where they are in life, making it easy to take action and meeting them in a media that is appealing will help them improve their retirement readiness.