The Generation Gap

By Lisa Smith AAA

The words "retirement" and "baby boomers" are forever linked. The baby boomers are living longer, retiring earlier and enjoying more active golden years than any previous generation. Unfortunately, according to recent a 2011 study done by Hewitt Associates LLC, the generations that follow them aren't faring as well in the retirement savings department. We'll present the data on retirement savings for Generations X and Y, and explain why the younger generations need to save even more than their parents.

TUTORIAL: Retirement Planning

The Changing Face of Retirement
While baby boomers (ages late 40s to mid-50s) often have pension checks to supplement their Social Security income, future generations aren't so lucky. Employer-sponsored defined-benefits plans are on the road to extinction as employers replace them with defined contribution plans. Social Security is projected to replace a smaller and smaller portion of retirement income for each succeeding generation. According to a 2011 Social Security Trustee Report, the Social Security Administration notes that 2010 was the first time since 1983 the social security program was in a deficit. When the entity that sends out the checks warns that it has just spent more money than it makes, younger workers should be maximizing the amount they contribute to defined contribution plans - unfortunately, this isn't what's happening. (To learn more, read Introduction To Social Security and The Demise Of The Defined-Benefit Plan.)

Generation X and Y are Falling Behind in Savings
Among workers in their early 30s to mid-40s, one-third of employees do not participate in an employer-sponsored contribution savings plan, according to a 2010 report released by Hewitt Associates. The report further notes, that without any individual retirement savings, these workers can expect their retirement incomes to fall 6.4 times short of the income they earned during their working years, assuming there is no pension available with their current employee. If there is a pension available, this short fall drops to 4.2 times pay at retirement.

The 2010 Hewitt Associates report also mentions that nearly 30% of people working in their early 30s to mid-40s still possess outstanding loans. At this age range, people tend to place buying a house and paying for children as greater priorities than saving for retirement. Also, any excess saving is placed into these two categories before retirement savings.

When it comes to retirement planning, the generation characterized by youthful ambition hasn't grown up yet. Among people aged 18 to 25, 50% of eligible employees do not participate in an employer-sponsored contribution savings plan, according to Hewitt Associates. Interestingly enough, of those who do participate 41% do not contribute enough to maximize their company matching program in their employer-sponsored retirement savings plan. This increase in participation comes from more automated enrollment into defined contribution plans. According to the report, if we take their current saving structure, this group's retirement savings will fall short by 6.3 times their current pay on average. This means they will likely have to work longer and change their saving habits.

While the lack of knowledge about investing is frequently cited as the reason for not saving, it's a problem that should be easy to fix for a generation characterized as tech-savvy and having a futuristic mindset. The Internet provides easy access to a virtual library filled with information about how and why to save for the future. (For more information on saving, see Delay In Savings Raises Payments Later On and Fundamentals Of A Successful Savings Program.)

How to Make Expectations and Reality Meet
Despite their failure to save, both Generations Xers and Yers have high hopes for the power of investments to save the day when it comes to retirement. Many expect their 401(k) plans to provide income for retirement.

In order to make these hopes a reality, saving rates among these generations needs to jump significantly. According to Hewitt Associates, Generation Xers contribute an average of 6.3% of their pre-tax salary to employer-sponsored savings plans, and members of Generation Y contribute just 5.3%. Baby boomers, on the other hand, put away 8% of their salaries.

Despite the low savings rates, members of Generations X and Y still have time to act. Generation Xers that do contribute to their employer-sponsored retirement savings plan, can increase the amount of contribution, as only 30% are contributing to their employer-sponsored plan maximize employer matching. This mean a large portion of Generation Xers are leaving free money on the table by contributing too little. Members of Generation Y can do even better, as they have more time to save.

Regardless of your generation, if you aren't already nearing retirement age and covered by a pension plan, the burden of saving for your future is likely to fall squarely on your own shoulders. Rather than ignore it and hope for the best, the time to plan and act is now. To get started, find out whether your employer offers a 401(k) program, and whether or not the company matches employer contributions.

If there is a match retirement savings program in place, you can start to save for your future by contributing enough to earn that match. With many plans, a 6% contribution earns a 3% match. That's a 50% return on your investment even if the investment you select never increases in value. Once you're getting the match, increase your contribution rate each year when you get a raise. Many people tend to think of raises as more disposable income. If your standard and cost of living are both comfortable and consistent, investing in the future can help maintain that level well beyond your working years.

The Bottom Line
Before long, you'll be on your way to building a nice nest egg. If your employer does not offer a 401(k) plan, it's time to open up an IRA. While you won't earn a company match in your IRA, you will still get the benefit of tax-deferred growth. Regardless of whether you save in a 401(k) plan or an IRA, the important thing is that you save. (To read more on the subject, see Determining Your Post-Work Income, A Tour Through Retirement Plans and Retirement Planning Basics.)

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