Bad news: Gen Y is on its way to a financial crisis that will top anything we’ve seen. It starts with heavy college debt and ends with meager retirement savings, unless something changes. The sense of entitlement will disappear for the kids of a generation that were seldom told they couldn’t have something. Gen Y faces increasingly bleak job opportunities since many of their Baby Boomer parents and colleagues can’t afford to retire and are clogging up career paths. The best opportunities will be based on competition and merit rather than merely showing up, like they did to earn those soccer trophies not that long ago.
Good news: Gen Y tend to be savers! They also tend to be spenders due to the immediate gratification they became accustomed to thanks to their Baby Boomer parents. Baby Boomers and Gen Y outnumber any of the other generations. It is important to realize that their collective buying power will continue to drive the economy for the near future.
The glamour days of retirement are fading. In reality, a long, comfortable, worry-free retirement was more a fad than a trend. Clearly, the definition of retirement today is much different than it was 25 years ago.
Retirement planning has changed dramatically. There is continued concern about the long-term viability of Social Security. Defined benefit pension plans are becoming extinct. 401k plans have been transformed from savings plans into retirement plans where participants bear the investment risk and the longevity risk, which is having insufficient money at some point during retirement.
Like Social Security, 401k plans were never meant to be the primary means of retirement savings. The original 401k plans had features that allowed, and perhaps even encouraged, participants to access their money for things like buying a house, sending (Gen Y) kids to college, and paying medical bills. Total contributions of 8-10% of pay (combining employee contributions with employer matches) have become the norm, even though most people should be saving a number closer to 12-15%.
On the plus side, there have been notable improvements such as auto-enrollment and auto-escalation features that nudge employees to save for retirement. Qualified Investment Default Alternatives (QDIAs) allow plan sponsors to offer target date funds that are more suitable to participants’ time horizons. A sharp focus is being placed on lifetime income to address the problem of longevity risk. These are all very positive developments, but we need to move further faster.
The emphasis has been to provide people with the latest tools for managing their investments. Please, no more tools! Retirement readiness is about people, not just their investments. People don’t need more tools because they don’t know what needs to be fixed. They need more solutions.
We must instill the importance of saving for retirement in the minds and hearts of Gen Y, even if they have little to save. They may pleasantly surprise us and turn out to be overachievers when it comes to retirement readiness, even without giving them trophies!
Be sure to read my blog about retirement readiness and Baby Boomers, « Retirement: ready or not here I come. »