Millennials realize the urgency in saving for retirement, but their goals and how to reach them might not be realistic, which provides for an ideal opportunity for financial advisors, according to a recent study by Natixis Investment Management.
Millennials are viewing their retirement planning differently from other generations, with more of a focus on defined contribution plans and less of a reliance on Social Security, said the 2023 Survey of Defined Contribution Plan Participants Survey.
“It’s because they’re sensing that perhaps Social Security benefits will be reduced by the time they retire,” said Dave Goodsell, executive director at the Boston-based Natixis Center for Investor Insight and author of the study. “It’s really making them think differently about how they’re going to fund retirement, how they want to invest for retirement, and what their expectations are when they get there.”
The survey questioned 736 DC plan participants and organized them by age groups: baby boomers, Generation X and millennials. It found that the opinions of millennials varied significantly from the rest of those surveyed based in large part on their perception of the markets and Social Security.
For instance, only 46% of millennials have confidence that Social Security will factor in their retirement savings. That is low compared to 66% of Generation X and 90% of baby boomers.
Given those feelings, millennials are more dependent upon their DC plan to serve as the foundation of their retirement plan with the older generations less so as 85% of millennials believed that most of their retirement savings will come from DC plans. Whereas only 71% of Generation X believe that and only 46% of baby boomers.
The increasing reliance on DC plans is a natural evolution of the retirement savings industry, according to Goodsell. Moving forward, DC plans will become critical in funding retirement plans, he said, especially as many pre-retirees become less reliant on certain programs including pension plans. Only 38% of those surveyed have a pension plan, the study found. That is limited because only a few professions still offer a pension plan.
As DC plans grow in relevance, the younger generations are calling for them to become mandatory for companies and their employees, according to the study. It found that 88% of millennials surveyed believed that it should be mandatory that employers offer retirement savings plans to employees. And 87% said that it should be mandatory that companies contribute to those plans.
That sentiment is shared by older generations, but to a lesser extent as 79% of Generation X said plans should be mandatory and only 74% said employer contributions should be mandatory. Finally, 70% of baby boomers wanted mandatory plans with only 67% wanting mandatory employee contributions.
The rationale for this belief seems to stem from a desire from millennials to make saving for retirement easier so Americans do not have to actively do it, according to Goodsell.
“I would look at that number in terms of societal,” he said. “Even with good savings habits, individuals will be looking at what are we as a society doing to ensure that people can be secure in retirement.”
Millennials got a head start on saving compared to other generations. In some cases, they started saving 11 years before baby boomers did because they grew up hearing about the unreliability of Social Security and seeing the recent hardships of the economy, Goodsell said.
However, just because this generation began saving earlier, does not mean they are realistically prepared for retirement. Many millennials want to retire at 60 with about $891,000 saved for retirement, the report found. The problem is, millennials believe their retirement will last at least 25 years, which means their savings will not, according to Goodsell.
While these numbers may not be realistic, Goodsell said they represent a tremendous opportunity for advisors to point them in the right direction. The good news is millennials are open to hearing from professional advisors, he said.
“Millennials tend to be really focused on advice and they like professional advice,” he said. “That’s the opportunity for advisors in this one but to me it comes down to people who feel in general that they need more support to help them get there.”
That is not to say that there isn't opportunity with Generation X or baby boomers, Goodsell explained. For Generation X, advisors should start seeing them as pre-retirees and helping them plan for what they need to do in the next few years to get ready for retirement.
As for boomers, who might be retired or on the cusp of it, advisors can help them create a distribution plan. That plan must have all the contingencies figured out as well as a steady and reliable source of income, according to Goodsell.
As advisors and pre-retirees determine how best to plan for retirement in the face of a struggling economy, Goodsell said many can look toward the millennial generation for how they are doing it because on what they have seen and their perception of the future.
“They’re growing up with the news behind them of how difficult it’s going to be to fund retirement and they’re listening and trying to find a plan through,” he said. “Everybody could learn from some of the things that we see in these trends, and I think the millennial idea is something you need to pay attention to because they're going to really drive what the future of retirement looks like.”