Several years ago, a Cambridge study suggested auto-enrollment alone would not solve the dilemma of too few younger employees saving enough for retirement. More recently, the Society for Human Resource Management’s 2020 Employee Benefits report concluded, “51 percent of respondents automatically enroll new or existing employees into a 401(k)-type plan, up from 39 percent in 2018,” and “26 percent automatically increase employee contributions annually, up from 18 percent in 2018.”
While the needle appears to be moving in the right direction, it’s unclear if it’s a good thing. Judging from the results of a 2022 study, younger generations might have a false sense of security regarding retirement. The Goldman Sachs 2022 Retirement Survey & Insights Report indicates the younger the generation, the less likely they feel they’re either “somewhat behind” or “very behind” schedule regarding saving for retirement.
Why do younger people have unrealistic goals about retirement?
Don’t blame auto-enrollment for this overconfidence among younger generations. It could simply mean retirement is beyond their perceptual horizon.
“I am not sure if they have unrealistic expectations, or they cannot envision a time that is so far in the distant future,” says Lawrence Sprung, author of Financial Planning Made Personal at Mitlin Financial in Long Island, New York. “It is hard to have realistic goals about something it is difficult to even think about because it is so far away. A fiduciary advisor could help work with them to help them understand what may or may not be achievable and work with them to continually update their goals and expectations as time goes on. Unrealistic expectations and goals can be two different things, and we must educate younger people on how they can go about separating the two and working towards their future.”
Part of this overconfidence resides more in faith than in fact.
“I think young people tend to overestimate their returns potential and underestimate the amount they need to set aside, and both of those become a challenging combination,” says Brian Haney, CEO of The Haney Company in Silver Spring, Maryland. “Many young people these days also seem to have over-inflated notions of how much they are going to get paid. To help them get a more realistic outlook, we usually help do a detailed projection of income needs based on current earnings and use tools like eMoney and other software to help show the raw numbers. Numbers don’t lie after all, and once you see the data you cannot unsee it. Then the only question they are left to wrestle with is, ‘Will they develop the financial discipline to target that future scenario or not?’”
Why it’s worth saving money when you’re young.
It’s tough to garner this discipline when things look bleak. For younger generations, their fiscal living experience is nothing but depressing. Yes, the market has drifted upward, but larger macroeconomic issues have rendered a perfect storm where it’s almost impossible to trust in any positive outlook.
“Young people have had an especially tough start to their financial lives,” says Doug Ornstein, senior integrated solutions manager at TIAA Wealth Management in Charlotte, North Carolina. “They may have entered the workforce during the aftermath of the Great Recession, and they may have also been financially impacted by the pandemic, inflation, the high cost of owning a home and costs of higher education. These headwinds may have contributed to a sense that what was possible is no longer possible, creating the sense that what we traditionally view as retirement is unrealistic. To get closer to reality, we need to provide more opportunities for young people to learn about money. Financial literacy is the beginning point to a more realistic view of their goals.”
Getting over this hurdle will allow younger employees to save earlier and reap the benefits of compounding.
Why is it smart to start saving for retirement at a young age?
Implementing an aggressive but realistic savings plan during your early working years represents the first step. It becomes a smart decision only when you invest for the long term.
“The biggest gap for younger people is that they could benefit from being more heavily invested in equities while they are younger,” says Loreen Gilbert, CEO at Wealthwise Financial Services in Irvine, California. “Many younger people were traumatized by the Great Financial Crisis and saw how their parents were affected. Therefore, they have been more conservative in their investments. Educating younger investors as to what they need for retirement, how much they need to save and how to allocate properly based on age would help younger people to get closer to reality on retirement goals.”
What is the best age to start saving for retirement?
If you think about it, the best time to start saving for retirement is before you start saving for retirement. It’s all about preparing your mind to do what needs to be done.
“Younger generations don’t think they can ever retire because they don’t believe in retirement planning,” says Jung She, a financial advisor at Bogart Wealth in McLean, Virginia. “Clients who engage their kids at an early age seem to be much more open minded. Education is key.”
This means parents need to lead by example. They shouldn’t be afraid to discuss in front of the kids what they’re doing about saving for retirement.
“Our society does not do a great job teaching people about finances or facilitating discussions about money,” says Brian Walsh, senior manager of Financial Planning at SoFi in Grand Rapids, Michigan. “For young people, their only experience with retirement may be with parents or grandparents. Some families talk about money, but most do not, so it is difficult for them to learn from those real-world experiences. Without practical experience, people make judgments based on limited information, which means they can either drastically overestimate or underestimate what it requires to retire. Talking to their parents openly about money and running their own retirement projections can be two simple steps to developing a better plan for their own retirement.”
Besides taking care of themselves, parents can also begin to get their kids in the groove of retirement saving by opening up a Child IRA for each of their children. This is the ultimate “saving early” strategy.