Not your Parent's Retirement Plan

One of the most common questions I am asked by clients, friends and family is what made you want to be a financial planner?

Working with people and helping them better understand and control their own finances was something I knew I always wanted to do. 

With over eight years of experience working in financial services, I have learned that the most basic area people need help with is saving for retirement and understanding the different types of accounts available.

In 2017 Fidelity Investments conducted a study surveying over 3,000 working households that analyzed the overall retirement preparedness of Americans based on workplace and individual savings data.  The respondents were between the ages of 25-74, stated that they expect to retire at some point and are actively saving.  The good news is that the savings trends in the study are improving, the bad news is that it may not be enough.  The study revealed at least 28% of those surveyed are at risk of not being able to fully cover essential expenses in retirement and my need to make significant lifestyle adjustments.  The other major finding is the Millennial savings rate has been flat since 2016; this generation is also not investing as aggressively as they should be.  By being too conservatively invested, investors miss out on the benefit of compounding returns over time. 

It is often joked about that people spend more time researching and buying a new car than they spend on their own investments and retirement.  Retirement accounts should be given the same level of attention (if not more) that is given to current income.  People spend decades working providing for themselves and family, often forgetting that they are also working for their second income – their retirement income.  Whether you plan to retire at 55 or 80 – everyone needs to have a nest egg to live off of as they age because it may not be within our control when the paychecks stop.  With new medical advances every year, our life expectancy is the longest it has ever been.  To reduce the risk of outliving assets, consider planning to need income well into your 90’s and potentially even longer. 

One of the greatest fears I have for my generation is the lack of preparedness for the reality of what our financial future holds.  Today’s Millennials are one of the largest and most educated, diverse generations in US history, however, we are viewed as the least financially savvy when it comes to basic budgeting and saving.  As we start making more money and/or inheriting wealth, it is necessary to acquire the financial acumen so as to make the right financial decisions.  It can take only a few minutes to make a bad financial decision, but years to undue to the damage.  We are also entering an era where we cannot rely on traditional retirement safety nets like pension plans and Social Security.  As it stands today, 67% of a retirement income may be left to the retiree’s responsibility.  Meaning that we will be personally responsible to use our own resources (investments and income) to fund future retirements.  The remaining 33% is still expected to come from outside sources such as Social Security and pensions, but who knows what Social Security will look like in the future.  Defined contribution plans have also emerged as the replacement to pension plans.  This has shifted the risk from the employer to the employee to be saving and investing these funds on their own. 

The truth is Millennials are going to have to save more than any generation before them.  Unfortunately, rather than planning for this reality, many of my peers have instead chosen to spend their time traveling now while paying down student loans and credit cards or investing in a new business.  While these are all admirable goals to be pursuing, it doesn’t mean retirement saving should be all or nothing. 

A recent study conducted by the National Institute of Retirement Security found that two-thirds of millennials have nothing saved for retirement.  Of the 34% working individuals who are saving for retirement, only 5% are saving adequately.  Another concern uncovered by a separate Fidelity study that was based on their own analysis of their 24,000 record-kept retirement plans is that cash-out rates among younger employees remains high.  41% of plan participants under the age of 30 are opting to take a full distribution of their retirement account when changing jobs.  Oftentimes spending the balance on miscellaneous expenses after paying a 10% penalty fee and income taxes. I agree that many people may not be planning for retirement because they are unsure of where to start or are focused on paying off student loans or other debt.  However, it is possible to gain better control over your financial future by educating yourself. 

What else is keeping this generation from saving in retirement plans? One of the most frequently cited reasons Millennials are not saving for retirement is ineligibility to participate in an employer sponsored plan due to tenure.  Most employers require participants to have at least a year of service with the company in order to participate in a retirement plan.  With more than 50% of Millennials having been with their existing company for a year or less, this is drastically reducing the number of eligible participants.  This generation pursues part-time employment at almost double the rate of GenX which is a large factor in their lack of plan eligibility.[1]  The job-hopping myth of this generation, however, is not drastically different than their parents’ own behaviors when they were younger.  In a study conducted by Pew Charitable Trusts, it showed that 75% of college-educated Millennials were employed for more than 13 months with their current employer in 2016.  This is compared to just 72% of GenX workers who were with the same employer for more than 13 months in the year 2000.  If you are an individual who finds themselves ineligible to participate in a 401k or 403(b) plan, the other option is saving in a Traditional or Roth IRA.  These accounts allow you to defer pre or post tax funds up to $5,500 annually (or $6,500 if older than age 50). 

Are you concerned about your second income?  These simple steps can help you gain more control over your financial future if done today.

  1. Already participating in your employer sponsored retirement plan?  Review your asset allocation and holdings.  The goal is to provide exposure to various asset classes that provide opportunity for growth, outpace inflation, while maintaining a degree of downside protection.  Making smart investment decisions is within your control.  If you are not confident in selecting your own investments, contact your employer’s plan provider for assistance or work with a financial planner or investment adviser who can provide a professional recommendation.

  2. Take advantage of automatic deferral increase programs.  This is a great way to painlessly improve savings rates where you can set it up so contributions increase 1% each year.  Unsure of how much you should be contributing?  First, be sure to contribute enough to get the entire company match if they offer one – it is basically free money.  Depending on the situation, you may only be able to afford to contribute the minimum to get the match.  Or it may be in your best interest to defer the maximum allowed for tax purposes.  For 2018, the 401(k) and 403(b) employee contribution limits are $18,500 if under age 50, if over 50 the maximum is $24,500.  Deferral amounts should not be a set it and forget it strategy.  As life events occur such as having a baby, getting married, buying a house or even separating from a spouse they should trigger a review of your savings strategy. 

  3. Own your own small business? You still have great retirement plan options! If you don’t want to be working in your business forever then you must start taking care of your own financial future.  Don’t rely on living off of the passive income you may generate from selling the business or becoming a non-active owner.  The right type of plan will depend on the type of business you have, number of employees, and your tax strategy.  With any type of plan, your employer contributions are tax-deductible.  If you are a solo owner, consider a SEP IRA or Individual 401(k).  Both plans are easy to manage and low cost.  They provide the flexibility to change contribution amounts each year, as well.  A SIMPLE IRA is another easy to manage, low cost retirement plan option that is best suited for businesses with less than 100 employees who want to provide a matching savings incentive but may not be ready for the costs of a group 401k plan.  The employer can choose to make a 1-3% matching contribution or 2% non-elective contribution to all eligible employees. 

  4. A little planning can go a long way.  Financial planning is not meant to be a service prescribed to only retirees or high net worth individuals.  Younger generations have the advantage of time on their side and can drastically improve their financial outlook with some basic planning strategies.  Having a neutral third party, like a financial planner, review your finances can lead to better budgeting, debt management and an investment and savings strategy to follow.

If you would like to discuss your second income or learn more about retirement plan options please contact our office today for a complimentary review of your financial situation!

[1] J. Brown, 2018, “Millennials and Retirement”, National Institute of Retirement Security, Washington, D.C.