Question: What is your biggest concern when you look at how the generations are managing their finances?
Liz Davidson, CEO of Financial Finesse, answers questions regarding their 2013 Generational Research report:
The most immediate threat, from an economic perspective, is older Baby Boomers (age 55-64) being unprepared for retirement. You would think that recent stock market performance would make a big difference, and that post-recession employees would be back on track now, but it’s not that simple. A large nest egg in and of itself is not enough to successfully retire.
Success in retirement is not only about how much you accumulate, but how you manage the assets that you do accumulate so that they last a lifetime. Without proper planning, Boomers put their retirement security in jeopardy. Fifty-one percent of Baby Boomers aged 55-64 report they have NOT run a retirement plan projection, despite the fact that they are very close to retirement age and only 22 percent report having long-term care insurance in place, despite the fact that the average cost for nursing home care is more than $50,000 a year and climbing, according to AARP.
Q: What are the economic implications of this?
In some cases, older Boomers are retiring with insufficient assets because they haven’t figured out how much they need to save for a comfortable retirement and/or are at risk because they have no plan as to how to manage their assets in retirement. Both of these dynamics could cause them to become dependent on their families or the government at a time when both are under significant financial pressure.
On the other end of the spectrum, more employees are reporting they plan to delay retirement. According to the Employee Benefit Research Institute, 22 percent of employees expect they will need to delay their retirement, and 33 percent expect they won’t be able to retire until age 70 or older, or never at all. Based on our experience working with pre-retirees, we believe that a large percentage of these employees are planning to work longer than they would like to because they have not effectively planned for retirement and don’t know how to navigate this change from a financial perspective. In instances where employees delay retirement due to poor financial planning (as opposed to a genuine desire to continue working), the employer faces huge financial costs and the employee may be jeopardizing their physical and mental health.
Q: You say that Baby Boomers’ lack of retirement preparedness poses the most immediate threat. Does that mean this is the biggest threat?
No, not really. When you factor in everything that we know right now, Gen Xers face the biggest obstacles. They are behind other generations in key areas of financial planning, and are particularly behind when it comes to basic money management skills that drive the attainment of key financial goals. They also face the most obstacles in terms of financial pressures, often juggling the expense of raising minor children with the expense of taking care of elderly parents, all while having mortgages and car payments that weigh them down. Lastly, they are at a disadvantage to the other generations, having less time than Millennials to save for retirement and other long-term goals, and less expected benefits from employers and Social Security than Baby Boomers.
Q: What about the millennial generation? In a recent report on retirement preparedness, you call them the lost generation. How do you think they will fare financially?
Honestly, that depends on many factors. I believe they will suffer through higher taxes and higher inflation for much of their careers, and they will almost certainly receive less support from their companies and the government than older generations. They lag all other generations when it comes to retirement planning, with only 29 percent
having run a retirement projection, 37 percent having taken a risk tolerance assessment, and 29 percent saying they rebalance their investment accounts.
That said, Millennials are doing a relatively good job with respect to day-to-day money management (despite record levels of student debt and high unemployment). They came of age during the Great Recession, so they are aware of what it’s like to struggle financially and have a desire to avoid that fate.
They also have time, technology, and idealism on their side. We are actually seeing more Millennials starting their own financial education businesses, in many cases leveraging technology to automate positive financial behaviors. When it comes to social responsibility, they appear to be reminiscent of the Boomers in their sense of connectedness to the world, and they actively want to do what they can to make the world a better place. It is entirely possible that financial literacy could become a cause Millennials galvanize around and that this generation reinvents the way we think about and manage our finances, and ultimately redefines retirement.
About Financial Finesse:
Financial Finesse is an unbiased financial education company providing personalized and innovative financial education and counseling programs to over 600,000 employees at over 500 organizations. Financial Finesse partners with organizations to reach goals such as reducing fiduciary liability, increasing plan participation, decreasing employees’ financial stress, and increasing productivity through its unique approach to financial education. Financial Finesse does not sell products nor manage assets. For more information, visit www.financialfinesse.com.
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