March 24, 2011

Apparently We Have Not Learned Our Lesson

Last week I received the results of two interesting studies. I am not vouching for the accuracy of either since they were both press releases from firms with a vested interest in the financial planning and investment industries. But that doesn't necessarily disqualify the data. I found the information worth reading and thinking about. I trust you will, too.

I found the first release startling. After all the problems of the last few years and all the bad press about Baby Boomers being unprepared to financially retire, this is the last thing I thought I'd read:

Younger workers continue to delay retirement savings

When it comes to saving for retirement, Generation Y is not taking a cue from their Boomer parents, many of whom are facing financial challenges as retirement looms. The majority (55 percent) of Gen Yers have not started to save for retirement, and fewer than a quarter (21 percent) are actively planning for retirement.

A new survey, commissioned by on line investing firm Scottrade, shows that 60 percent of Gen Yers (born 1983-1991) saved nothing toward retirement last year and 40 percent plan to save nothing in 2011. An additional 21 percent plan to save only one to two percent of their income this year.

“What Gen Y may not realize is that older generations based their retirement planning on the three-legged stool of Social Security, savings and employer pensions,” said Craig Hogan, director of customer intelligence at Scottrade.

“The approach their parents and grandparents took toward saving is no longer appropriate because the old model doesn’t exist. By the time Gen Y retires, they may have only one reliable leg to stand on – their own savings – and they need to plan accordingly.”

When asked what age they’d recommend people start saving for retirement, Gen Yers recommended a mean age of 29.2 years old, giving even the oldest of the group two more years before this generation thinks they need to start saving.
As the first class of Baby Boomers (born 1945-1966) turns 65 and evaluates whether they can retire, many have regrets that can provide an important lesson for Gen Y. Nearly half (46 percent) of Boomers didn’t start saving for retirement until age 35 or older. However, if given a second chance:
  • The majority of Boomers (58 percent) would have started saving at a younger age
  • Nearly half (45 percent) would have saved more
  • Fifty percent would recommend starting to save earlier than age 25
Gen Y need look no further than Boomers’ current retirement picture to see the effects of delaying saving for retirement. Almost half (47 percent) of Boomers have $100,000 or less saved, and more than a third (37 percent) are concerned that they will have to work in their retirement years. Almost a quarter (23 percent) think they’ll still be working at age 75 or older.

“Considering the Boomers’ plight and how easy it is to invest on your own in a very low-cost way, we would have expected to see Gen Y reacting by increasing its savings,” Hogan said. “But our data shows that the vast majority – 73 percent – currently has less than $25,000 saved for retirement. And that number has been about the same for the past three years.”

There is no shortage of lessons to be learned from the Boomers’ retirement planning experiences,” Hogan said. “The good news for Gen Y is that they have the advantage of Boomers’ hindsight, youth and enthusiasm. If Gen Yers focus their interest in investing toward their retirement portfolios, there is still plenty of time for them to get where they need to go.”

Gen Y’s lack of action doesn’t stem from lack of awareness or interest. Almost three-fourths of Gen Yers (73 percent) realize that they are not saving enough for retirement, and previous Scottrade survey data revealed that Gen Y finds investing fun and interesting. In addition, they are the most likely to manage their own investments.

The survey was commissioned by Scottrade and conducted on line  Fielded with a nationally representative sample of 1,000 respondents between January 13-18, 2011, the survey examined attitudes, behaviors and trends related to retirement. All participants were at least 18 years of age that were involved in making investment decisions in their households. Margin of error for the overall poll is +/- 3.1 percent at 95 percent confidence. (That last bit of statistical detail tells me the results are valid for the type of person surveyed).

Employer Matching Contributions

In a glimmer of somewhat better news this survey notes that approximately 30% of employers plan on reinstating matching contributions this year. The relevant portions of that press release are as follows:

Despite high unemployment rates, signs of economic recovery are surfacing according to the 7th annual Retirement Plan Survey, conducted by Grant Thornton LLP, Drinker Biddle & Reath LLP and Plan Sponsor Advisors LLC. After significant cutbacks in employer matching contributions over the past few years, 30 percent are planning to reinstate previously eliminated or reduced matching contributions during 2011. Forty two percent do not have plans to reinstate their match this year.

It should be noted that when asked this question one year ago, over half (53%) of the employers had not decided whether to return to previous contribution levels and 33 percent had no plans to do so. This indicates a significant shift in plan sponsors’ outlook on matching contributions since a year ago.  Despite cutbacks by both plan sponsors and participants, 83 percent of plan sponsors reported that either very few or none of their employees had expressed concerns about their retirement readiness.

“Considering the issues facing participants, including reduced employer contributions, decreased plan balances, economic uncertainty and regulatory/administrative updates such as Roth conversions, participants may not be aware that they need to be concerned,” said Jennifer Flodin, Chief Operation Officer of Planned Sponsor Advisors LLC.

My initial reaction was 30% seems rather paltry. But, in retrospect, the economy is not out of the woods by any means. Japan and the Mideast problems will have consequences. Importantly, compared to a year ago positive movement is quite clear.

As regular readers know I usually don't delve very deeply into financial issues; there are plenty of blogs that specialize in that. But, these two studies seemed worth sharing. The first, frankly, baffles me. What Else has to happen for folks to understand their own responsibility to prepare for their future?

Any comments to what they say? Are we incapable of learning from past mistakes?


  1. Please forgive the political nature of the comment, but I feel this a political issue.

    Quite frankly, I don't expect for social security to exist when it would be time for my own satisfying retirement. The system is already insolvent, bankrupt, and paying out more than we are taking in.

    Besides, it is and has always been better to plan for your own retirement without expecting and relying on a check from the government

  2. HI Darren,

    I don't view your comment as a political one, rather a realistic one. That is why the first report is so distressing. If retirement funding becomes primarily an individual responsibility than why isn't the average savings rate substantially higher?

    I don't think most folks are as ready to face reality as you.

  3. What we are seeing, I think, is not a sudden change but rather a gradual shift over the last decades. Our upbringing and social environment shape our habits unless we consciously change them. The upbringing and social environment for the generations after the depression and the war did not create an awareness of potential need or a value of personal accountability. We reap what we sow.

    What will change it? I think nothing short of a breakdown of the current system. We can see that coming, but until it happens, I think we will continue down this path.

    It's not unlike what we do in our individual lives with other habits. It's often very hard to change until some external circumstance forces us to.

    A sobering post.

  4. Hi Galen,

    I believe you are exactly right. We don't change until there is no alternative. In the meantime we deny personal responsibility, and expect the universal "they" will take care of us, all the while complaining about potential cuts in benefits and the growth of the deficit.

    All cuts in expenses and benefits are good, unless those cuts happen to affect me.

  5. Hi Bob.

    I've continued to enjoy your posts but just haven't had a comment to share for a while.

    It would be interesting to see if the Gen Y lack of saving mirrors their parents. In our case, our children each started Roth IRAs in college. We encouraged those and separate investment accounts with some matching contributions. We learned these behaviors from our own parents.

    As for matching, I'm fortunate to be one of the owners of a professional business, and we have long believed in assisting our employees with their retirement. One way is dollar for dollar matching 401k contributions (we used to just contribute to the employee 401k without requiring employee contribution, but decided that we wanted to encourage employees to take some ownership in their future so we made a change to matching).

  6. Hi Rick,

    Interesting question. I would guess the parents' seriousness about preparing for the future probably has an important impact on their kids. That would make an interesting study for someone.

    Your dollar-for-dollar matching for employee 401K contributions seems like a tremendous idea to encourage savings. Have you noticed a change in employee participation since you changed to this approach?

    I appreciate you visiting and reading the blog. When so moved by the topic, I look forward to your insightful thoughts.

  7. Hi, Bob... I think that each generation has the opportunity to learn from that before them. Though, as you point out, the majority don't always take advantage of that opportunity. And I'm not sure why that is. I wonder if so many of us are distracted by materialism. Perhaps by our propensity to live for today. Short term reward. It's an interesting question to ponder. Bill

  8. One thing that might influence the lack of savings among young people is their lack of employment! You can't save what you don't have.

    My daughter graduated college 18 months ago and was lucky enough to stay on at an architecture firm where she interned. I would say 80% of the architecture graduates she knows have either left the field and taken any job they could get or they have lost the jobs they did have and are on unemployment. Others of her friends who graduated in various fields struggled quite a while to find employment, most often not in the field they studied in college.

    My daughter is a huge saver and has had money invested since she was about 12. Right now she owns her own home and she also owns a rental house as an investment. She isn't putting any faith in social security but is busy building something for herself.

    Many young people have had to move back in with parents or take jobs paying less than they thought they would get so they are just getting by. It will be hard for them to save much toward their future when they are scraping by in the present.

  9. Hi Bill,

    If the Boomers understood what their parents or grand parents went through during the Great Depression it is unlikely the present financial hole would be so deep for so many. I'm afraid you are right: we have a hard time thinking about the future in concrete terms. Live for today is more fun.

  10. Good morning, Joan,

    You make a very valid point. Saving is not a priority when just getting or keeping a decent job is tough for many.

    My youngest daughter is 30, has a good paying job, but is not counting on Social Security to be there when she needs it. She expects to keep working forever.

  11. I have worked at probably 12 companies over my career (wow - that many?) mainly start ups bot a few bigger and some public as well. During that time, one company offered a 3% matching to their 401k plan - the rest offered none. I get it for start ups who are just trying to make it but bigger companies could really help and encourage their employees to save if they put a little skin in the game as well.

  12. Hi Dave,

    Rick's comment above relates to your thought. Companies encourage their employees to save by dollar matching 401k contributions(up to a point). As you note, having some of their own dollars invested seems only fair if the company is healthy and benefiting from their employees' efforts.

    12 companies? Can you name them all?

  13. I can name the nine school districts I have worked in:>)

    Joan makes some very valid points. Older workers are flooding back into the workforce at the lower level jobs- sucking them away from the 18-28 yr olds. ORRR- they are staying in the workforce much longer (including the women who were never IN the workforce 30 years ago)and keeping the younger people from rising.

    My own children are well employed- but struggle to save for retirement because they are saving for houses, cars, rings and children. I am shocked at the lack of benefits they are being offered- even at a high salary!
    Most of their friend's parents are struggling to save for their own retirement instead of funding their children's IRA. Personally, we are just saving for the next wedding....

    There is a time and place to save for retirement. I don't think that the hind site of people who spent their entire lives overspending will help their children save any earlier or faster. We try to lead by example. Work to be debt free or responsibly in debt (sounds funny- but a necessity at the old age of 26). Never carry a charge on a card AND save at least 50 bucks for retirement. When you get to those big salaries (or decide you will never get to those salaries) save like a crazy man! I think it will work for them as it has for us in the long run.

    You continue to put forth great posts! Thanks! Maybe I can catch you next time I am home.

  14. How is it possible to save for retirement when so many start with such large student loan debts?

  15. Thanks Anonymous and Janette,

    Both excellent points. I hadn't given any thought to the student loan issue. That can be a burden for years. Thanks, Anonymous.

    Janette, you are absolutely correct: leading by example is the most effective way to make a point. It is unfortunate my generation taught the ones that came after us all about instant gratification and that the future will take care of itself.

    The older workers re-entering the workforce should be proof positive that the future only takes care of itself if you take care of it first. I hadn't thought about their effect on wages and upward mobility of younger workers. Thanks for raising that issue.

    Yes, I'd love to buy you a coffee next time you are in Phoenix. We can share blogging stories.