It’s too soon to know if Social Security will be around to provide a safety net to the youngest employees in the work force. But retirement planning experts see trouble on the horizon with respect to the fiscal planning taking place by members of the Gen Y demographic, those who are currently between the ages of 18–30. Financial advisors can start working now with employers to help guide employees to the right strategies for retirement saving.
Aon Hewitt’s recently published analysis shows that about 50.3% of Gen Y workers participate in employer-sponsored defined contribution plans. This compares to a 71.4% rate for Gen X members and 76.4% of younger Baby Boomers. And when these younger employees change jobs, a majority (60%) tends to cash out the company-sponsored retirement plan instead of rolling it into another tax-free savings plan. Pamela Hess, director of Retirement Research at Aon Hewitt says the need for Gen Y to save is critical because “younger workers will have fewer future benefits from their employers and potentially the government,” as they age. Workers in this demographic generally believe they have decades before they have to worry about retirement and many are using free cash to pay down college debt or pay for a home. But many younger workers don't understand the time value of money. The typical 25 year old often does not realize that $5,000 pulled out of a retirement plan now could translate to $56,000 that could have been available at age 65.
Financial planners, advisors and services firms can help improve understanding of the retirement planning process by using some of the following techniques:
- Improve automated tools that default to higher savings rates when workers first sign up for a plan
- Require a minimal commitment of time for younger employees to enroll and use digital formats
- Use graduated employer matching amounts to increase employee contribution levels
- Offer investment advice to interested employees
As the economy continues to improve, more financial services companies will be marketing retirement planning advice and instruments, especially to younger consumers. The ad campaigns will likely target both employees and employers.[Source: New Analysis From Aon Hewitt Paints Rocky Retirement Picture for Younger Workers. AonHewitt.com. 10 Dec. 2010. Web. 18 Jan. 2011]