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The Generational Divide in Retirement Readiness

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PostPosted: Thu May 02, 2019 1:05 am    Post subject: The Generational Divide in Retirement Readiness Reply with quote

The Generational Divide in Retirement Readiness
New York Times (March, 2019)

Whether you’re a millennial, Gen Xer or baby boomer, you are most likely part of a grand, unplanned experiment: grand in the sense that it is big, unplanned in that there is no design to it, an experiment because you are a test case.

What have you been testing? Your level of responsibility for self-funding your retirement.

No longer do employers systematically provide the pensions or defined benefit (DB) plans that some from previous generations relied on in retirement.

The 1980s saw a confluence of factors, including longer life expectancies and government regulation, which favored defined contribution (DC) plans like 401(k)’s over pensions. “Employers began offering defined contribution plans, which cost employers less, but shifted the retirement savings burden to individuals,” says Emilio Pardo, the senior vice president and chief marketing and communications officer at Jackson Holdings, LLC.

With the responsibility of funding retirement in the last few decades largely left to workers, individuals have to “figure out how much they’ll need in retirement, how much to put in their DC plans, how to allocate those funds and how to spend down those assets when they retire,” says Tim Walsh, the senior managing director of institutional investments at TIAA.

Indeed, retirement income planning is “the nastiest, hardest problem in finance” the American economist William Sharpe once said.

“If a Nobel laureate like Sharpe finds this so difficult,” Walsh says, “it’s no wonder that the average American finds it overwhelming.”

So how have we been doing? Here’s a look by generation.

Baby Boomers
BORN 1946 — 1964

Boomers, whose ages this year range from 55 to 73, are the first generation to face self-funding — with varying results: Early boomers may have retired with full pensions, while late boomers, many of whom are still working, may have small pensions from their first jobs, retirement savings in defined contribution plans and other assets.

Overall, boomers joined employer-sponsored plans later than younger workers — whose median age is 35, according to the Transamerica Center for Retirement Studies — and generally, they have not saved enough. The median amount saved by people 55 to 64 is $120,000, according to the Federal Reserve’s 2016 Survey of Consumer Finances. This finding is not surprising. “They weren’t equipped to save for their retirements,” says Wade D. Pfau, a professor of retirement income at The American College of Financial Services and the founder of

Over time, many have reaped the returns of a rising market. “We came into the economy at a good time,” says Michael Harris, a chief financial planner and the senior education adviser for the Alliance for Lifetime Income.

$120,000 The median amount saved by people 55 to 64, according to the Federal Reserve’s 2016 Survey of Consumer Finances

Gen Xers
BORN 1965 — 1978

Gen Xers, who are 41 to 54, entered the workforce just as companies were switching to 401(k)’s. A few may even have squeezed in before companies froze their pension plans. Only 17 percent of Gen Xers expect to live on pensions, according to Prudential’s 2018 Retirement Preparedness Survey.

With tax-deferred retirement plans offered earlier in their careers, Gen Xers started socking away money at age 30, on average, earlier than many boomers, according to Transamerica Center for Retirement Studies. They’ve also taken advantage of developments in behavioral finance that include automatic 401(k) enrollment and investments that target funds to help employees manage their portfolios.

Still, Gen Xers aren’t saving enough. Younger Gen Xers had only $37,000 in median retirement savings in 2016, and older Gen Xers had $82,600, the Federal Reserve found. “This generation has inadequate balances across the board,” says Teresa Ghilarducci, a professor of economics at The New School for Social Research and the director of its Retirement Equity Lab. “That’s partly because the system isn’t designed for work lives that are unstable and wages that have been stagnant.”

That may be why Gen Xers are more than twice as likely as boomers to say they will buy an annuity, which provides protected income for life, before or when they retire (34 percent Gen Xers vs. 15 percent boomers), according to TIAA’s 2017 Lifetime Income Survey.

17% Percentage of Gen Xers who expect to live on pensions, according to Prudential’s 2018 Retirement Preparedness Survey

BORN 1979 — 2000

Millennials, ages 19 to 40, are the youngest generation tallied in this financial experiment, and most are the children of boomers. They began saving through employer-sponsored plans at an even younger age than Gen Xers (a median age of 24, according to Transamerica). This may be because they had front-row seats to their parents’ retirements and have lower expectations of inheriting wealth. They also are saving at a higher rate: at 10 percent of annual earnings, which is what the youngest boomers, who are less than a decade away from retirement, are saving. Gen Xers, meanwhile, are socking away only 8 percent.

Coming of age during the Great Recession has hardened millennials to be more conservative investors.


Millennials’ higher savings rate is impressive, given they are saddled with unprecedented student debt. And they may also be more cautious investors. Prudential found that millennials have almost as many of their defined contribution plans in cash as in equities (38 percent in cash vs. 39 percent in equities). “Coming of age during the Great Recession has hardened millennials to be more conservative investors,” says Melissa Kivett, senior vice president and chief customer experience officer, Individual Solutions, at Prudential Financial.

Millennials also show a greater interest in protected income for life than older generations. Though people have historically waited closer to retirement to buy annuities, millennials are buying them at a rate of 13 percent to that of Gen Xers’ 11 percent. And more millennials plan to buy them before or when they retire — 40 percent vs. 34 percent for Gen X, according to TIAA.

By all reckonings, the current system of self-funding has failed. The Center for Retirement Research predicts that half of working-age households will face downward mobility during retirement. Self-directed retirement vehicles “have not translated into retirement security,” researchers at The Brookings Institute concluded in a paper. “The de facto retirement paradigm has become to save as much as possible and hope you don’t live too long.”

Perhaps the most resounding judgment comes from Gen Xers and millennials. Their growing interest in annuities is an urgent call to address the inadequacies of today’s retirement system. “A lot of the retirement discussion has focused on accumulation, but we need to talk about income,” Kivett says. “An annuity that covers your core expenses is a great hedge for market volatility and longevity.”

With three generations in the self-funding retirement experiment, we seem to have come full circle, spurring a renewed focus on protected income for life.

Illustration by Ty Dale
Addressing the need for protected retirement income
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