The majority of workers between the ages of 20 and 29 (59 percent) in 12 North American, European and Asian countries expect to be financially worse off in retirement than their parents’ generation, according to research conducted by the Transamerica Center for Retirement Studies in collaboration with asset management company Aegon.
Retirement planning is essential to retirement saving, and the survey, based on responses from 10,800 employees, shows that Millennials are somewhat lacking in this regard. More than half (52 percent) have no retirement planning strategy, and only 8 percent have a written retirement plan.
It’s not that young people don’t know the importance of saving and planning for a financially secure retirement: Indeed, 71 percent of respondents believe that the current global economy makes retirement planning increasingly important.
“A surprising number of twentysomethings are committed to, or have the ambition to, save for retirement,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies. “The study found that future retirement shortfalls among employed twentysomethings will likely be due to a lack of opportunity to save, rather than a lack of will.”
The 12 countries surveyed—Canada, China, France, Germany, Hungary, Japan, the Netherlands, Poland, Spain, Sweden, the United Kingdom and the United States—represent employees who cumulatively have access to about 85 percent of the world’s private retirement assets, excluding government retirement benefits.
What Are the Obstacles to Retirement Planning?
The survey revealed that financial shortcomings are only part of the reason why the majority of younger workers are not adequately preparing for their retirement needs, with spending preferences playing a key role in the savings gap of advanced economies.
The single biggest factor preventing Millennials from investing for retirement is not having enough money to invest, cited by more than a third of respondents(37 percent; this figure drops to just 6 percent in the emerging market of China, where mean incomes are the lowest by far ($18,000). This suggests that lack of cash may be partly a state of mind, the report noted.
Fifty-seven percent of twentysomethings believe that saving for retirement is important but not a priority above other life goals such as marriage, starting a family, vacations and other leisure activities. This indicates that the savings gap is preference-driven.
Thirteen percent of respondents reported that they either do not know how to invest for the long term or they don’t understand investment products, charges and fees. “Ready solutions to this include improving young employees’ financial literacy about retirement planning and creating easier access to professional financial advice,” the report said.
Predictably, more pay tops the list of what would encourage younger workers to save for retirement (57 percent). The response rate was highest in Hungary (72 percent) and lowest in Japan (32 percent). As for the U.S., two-thirds of Americans (67 percent) said they would be encouraged to save more if they received a raise.
A more generous employer matching contribution in a workplace retirement plan can also encourage savings, with one-third of twentysomethings citing this as a valuable benefit. In the U.S. it has been documented that matching contributions to a 401(k) or similar plan drive up savings rates. Specifically, 39 percent of American workers in their 20s said a more generous match would encourage them to save more. Among other countries, Canadians were most likely to be motivated by a better match (44 percent), and Swedes were least likely (25 percent).
Almost one-fourth of Millennials (24 percent) would be encouraged to save more with simpler investment products that are easier to understand: 36 percent in China, 32 percent in the U.S. and 10 percent in Japan.
“Twentysomethings already recognize the high value of employer benefits, with 87 percent believing a workplace retirement plan with employer contributions will be an important factor when choosing their next job,” the report said. This percentage was highest among Chinese Millennials (93 percent) and lowest among the Japanese (74 percent). Meanwhile, 84 percent of young Americans reported valuing such benefits.
The general savings-product feature younger workers value most is protection against investment risk and, specifically, a product providing a guaranteed retirement income stream or lifetime income (82 percent), protection against inflation (81 percent) and a guarantee of no loss of initial investment (81 percent).
The findings showed that Millennial employees give less consideration to savings growth through investment returns. “This suggests that there is an opportunity to educate young workers about the trade-off between returns and risk management, and what they stand to gain,” the report said.
What Employers Can Do
“Twentysomethings have the ability to create their retirement destinies,” said Collinson. “Unlike older workers, twentysomethings have decades in which they can plan, save, invest and adjust course as necessary. They just need the opportunity and know-how to get started down the right path.” The report offered several ways that employers can address retirement planning for their younger workers:
- Auto-enroll employees in a workplace retirement plan. If an auto-enrollment workplace retirement plan is feasible, this can play a major role in getting young workers to save early and regularly, the report said. Employers can combine this with matching contributions and automatic annual increases of a worker’s contributions.
- Provide more flexible savings products. Organizations can get younger workers who think of retirement as “too far away” to start saving by providing flexible, easy-to-access and easy-to-understand savings plans as a starter option.
- Make company retirement plans more portable. Young people switch jobs much more often than previous generations of employees, so savings vehicles like defined contribution retirement plans need to follow employees when they move on.
- Make better financial education central. Workplace retirement education, alongside professional advice, can help guide young workers toward the right long-term priorities at an earlier age, the report said.
“For twentysomethings, retirement is decades away,” Collinson pointed out. “However, by making saving a priority today, their long-term savings horizon will help their savings grow with the compounding of investments over time. Getting into the habit of saving is not easy at any age, but the longer one waits, the harder it will be, especially with the need to make up for lost time.”
Roy Maurer is an online editor/manager for SHRM.
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