by Joe Mont
With decades to go before they retire, one might see those age 18 to 30 as having plenty of time and opportunity to save and plan for their future.
But the drumbeat of how older generations are scrambling to secure adequate retirement savings is being sounded for young people as well by Aon Hewitt, a global human resource consulting firm.
The usual suspects of stagnant wages, job insecurity and a steady decline in pension plan and retiree medical benefits may jeopardize the age group — termed by Aon Hewitt as being Generation Y, although other demographers give different years for inclusion in that group — as much, if not more, than their elders, research by the firm says.
Eight in 10 Aon Hewitt-defined Generation Y workers "will not meet all of their financial needs in retirement unless they significantly improve their saving and investing behaviors," the report claims.
After factoring in inflation and postretirement medical costs, its researchers project Generation Y workers will need to save 18.7 times their final pay in retirement resources — including Social Security, employer-provided defined benefit and defined contribution plans and employee savings — to maintain their current standard of living in retirement. A savings gap emerges, according to Aon Hewitt's research, because the generation's employees are on track to accumulate just 12.4 times their final pay, leaving a shortfall of 6.3 times pay, a third of their total needs.
The situation is "even bleaker" for workers without a pension plan, who have a shortfall of eight times pay, assuming no future leakage from withdrawals or cashouts, and that Social Security benefits are not reduced, rendering these scenarios optimistic at best.
Aon Hewitt cites many reasons for these shortfalls, including rising health care costs, increased life expectancy and the emergence of defined contribution plans as the primary retirement savings vehicle for most Americans. The biggest factor, however, could be Generation Y's saving and investing habits. Its analysis shows only half of Generation Y workers who are eligible to participate in a defined contribution plan do so, meaning they have accumulated very little savings, if anything, in their plan. Among those who do save, the average before-tax contribution rate is 5.3% of pay, with 41% of workers not saving enough to get the entire employer-provided match.
Even if workers do begin saving early, the new research claims that most cash out their savings well before retirement. Nearly 60% of Generation Y workers cash out their retirement savings when changing jobs, missing out on the opportunity for decades worth of tax-deferred growth on their investments. A 25-year-old who cashes out $5,000 from a retirement plan may potentially be sacrificing $56,000 at retirement in exchange for a small amount (perhaps only $3,500 after taxes and penalties are deducted).
"Younger workers will have fewer future benefits from their employers and potentially the government," says Pamela Hess, director of retirement research at Aon Hewitt. "They need to save a third more in their defined contribution plans than workers who are nearing retirement today, but there's clearly a lack of urgency to proactively save."
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