Bridging the Retirement Savings Accumulation Gap for Millennials
Research shows that the millennial generation is the best generation of savers since the Great Depression. This is good news. Millennials understand how important it is to save, and they want to save. But it doesn’t mean that they are saving in the right way or are saving enough.
But lack of savings growth among millennials has created an accumulation gap—the difference between needing to save and saving enough for retirement. Millennials might not be taking advantage of the best retirement savings vehicles (IRAs, employer-sponsored retirement plans, etc.). Financial organizations that shift their attention from baby boomers who are in the midst of retiring, to millennials who are active members of the workforce preparing for retirement, can revitalize the landscape of saving, and in turn, reap the rewards of new long-term customer relationships.
Who Are the Millennials?
Demographers generally categorize the millennials to be those born between 1981 and 1995, and the U.S. Census Bureau says millennials represent more than one-quarter of the U.S. population. This group is considered the largest, best educated and most diverse generation. But they are viewed as less financially savvy than their predecessors. Several studies show that millennials have lower risk tolerance than other investors and hold much of their savings in cash, rather than in investments. Other studies show that a high number of millennials do not have access to employer-sponsored retirement plans.
Paying Off Debt Is a Priority
The accumulation gap can be attributed in part to the dilemma millennials face between wanting to save and paying off a large amount of debt. An NBC News/GenForward survey report released in April 2018 indicates that three out of four millennials in the U.S. have some kind of debt. Credit card debt is the most prevalent type of debt among the group surveyed—46% said that they have credit card debt. Another 36% of respondents have student loan debt, 23% have medical bills, and 20% have mortgages.
Millennials who incur other major expenses prefer to dip into their savings for these costs, rather than incur more debt. Thus, they save for retirement in smaller increments.
Low Interest Rates Reshaped Saving
The accumulation gap also can be attributed in part to the perceived breakdown of traditional accumulation models, such as time deposits or cash accounts, because of near-zero interest rates. Low rates of return over the last several years have profoundly changed the landscape of saving—for retirement or otherwise—and this has affected the millennial population the most.
As young savers, prior generations started saving money in cash accounts or time deposits and actually received a measurable rate of return from their bank or credit union. Once they entered their prime earning years, many invested larger amounts in stocks and equity mutual funds for greater growth potential. Much of this was driven by their participation in employer-sponsored retirement plans, such as 401(k) plans. Later when closer to retirement, many of these savers returned to fixed rate and insured products, like CDs and annuities with banks, credit unions, and insurance companies, to preserve their savings.
Most millennials, however, are not following that path, in large part because of falling interest rates and because of their conservative savings strategies.
Access to Employer-Sponsored Retirement Plans
Recent studies show that a large number of millennial workers are without access to a company retirement plan. While surveys vary in percentages, a report by the National Institute on Retirement Security—Millennials and Retirement: Already Falling Short—states that only 55% of millennials are eligible to participate in an employer-sponsored retirement plan, compared to 77% of generation X and 80% of baby boomers. The result is a considerable shortage of millennial savers, and potentially a wide retirement savings accumulation gap for these millennials.
Millennials who have access have embraced retirement plans, primarily 401(k) plans, as their preferred retirement savings vehicle. But this group is contributing to IRAs at a significantly lower rate than previous generations. Millennials are also known to be frequent job changers and some prefer gig jobs. When changing jobs, they have access to roll over their retirement plan savings to another employer plan or to an IRA. This may be an opportunity for financial organizations to encourage maximum saving habits by investing in an IRA in addition to a retirement plan.
Those who do not have access to an employer plan could consider saving though a Traditional or Roth IRA, or other tax-favored accounts such as health savings accounts (HSAs) or IRA-based simplified employee pension (SEP) plans, if eligible.
One way financial organizations and advisors can begin to bridge the accumulation gap is to educate millennials. Educating millennials about the benefits of saving early (even if conservative amounts) and leaving the money in the retirement accounts to enhance investment growth can make a difference. After all, small amounts saved early in life can result in larger accumulations than large amounts contributed later in life, depending of course, on investment return.
It is crucial that millennials get the most from saving with a retirement savings vehicle that best fits them. Incorporating tax-advantaged retirement savings accounts into this education strategy will go even further.
Time to Reevaluate
Each financial services provider has a role to play in helping bridge the accumulation gap. It may require taking a hard look at existing savings products from the millennials’ perspective. This may mean no longer viewing savers and savings products the same way. It may require reexamining products, such as the Roth IRA, reevaluating how staff is trained to promote and discuss those products, and gaining a better understanding of how to align an organization’s values with that of the average millennial. After all, a financial organization’s future success in the savings market will depend heavily on millennial consumers.