What The Retirement Generation Gap Can Tell You About Your Financial Future

(Image: iStock.com/nandyphotos)

Today’s retirement generation gap demonstrates that millennials, GenXers, and baby boomers have stark differences in their approach to securing their financial futures. However, the recent TIAA Lifetime Income Survey reveals that even though retirement strategies varied dramatically across generational lines, each group holds a common desired outcome: To gain reliable monthly income over the course of their post-work life.

Here are some of the findings in the survey:

  • 84% of baby boomers plan to rely on Social Security for retirement income versus 69% of members of Generation X and 61% of millennials.
  • 62% of millennials and 60% of GenXers, respectively, expect to make withdrawals from retirement accounts; less than half of baby boomers say they will engage in a similar practice.
  • In terms of retirement vehicles, millennials are least familiar with annuities–insurance contracts offering guaranteed income for life over a set period of time. Only 20% of members of Gen Y knew about annuities, compared to 38% of GenXers and 41% of baby boomers. (The survey also found millennials to be the most likely to commit a portion of retirement savings to an option enabling them to receive a monthly payment for life.)

The TIAA survey also uncovered the divide between people at different income levels. For instance, those earning annual incomes of more than $100,000 are more likely to draw upon a range of options than individuals with annual incomes below $50,000. Another telling stat: 69% of those at higher income levels plan to withdraw savings from a retirement plan versus 41% of those at the lower level. And 40% of higher paid individuals are more likely to receive payments from a pension plan, compared to 19% of their lower paid counterparts.

In the second part of our interview, TIAA Chief Income Strategist Denise Garnick reviewed the impact of generational behavior and aging on retirement planning. Here are edited excerpts from that session:

BLACK ENTERPRISE: The survey results I found of great interest were retirement outlooks across generations. I would have thought more baby boomers would be less drawn to Social Security given that so many have been beneficiaries of 401(k)s and like vehicles?

DIANE GARNICK: Baby boomers [still had more of the defined benefit] experience, whereas Gen X did not. Companies did not start really eliminating defined benefit plans until the 1990s.

BE: So the baby boomers have still been used to getting such payments regularly than other generations?

GARNICK: Exactly right. The other thing I think is interesting is the baby boomer mentality. When you talk to them, many of them say, “The company I’m working for right now, does not have a defined benefit plan but I also know all I have to do is get one job for five years and then I’ll have income for life.” I don’t think Gen X and Gen Y think that way at all.

BE: When you look at the survey, there’s definitely not a focus on annuities–especially among millennials and GenXers. What does the survey tell you about the mix of retirement savings and investments people are using to gain lifetime income?

GARNICK: There are a couple of takeaways here. It used to be that people thought about lifetime income annuities as all or nothing. That is no longer the case. People should think about guaranteed lifetime income to cover their four basic needs, which are food, shelter, clothing, and healthcare. What we found is that people who cover those four have a tremendous amount of financial security and then create the opportunity to invest in other assets. That’s been a winning strategy and it will continue to be.

The other phenomenon that we see is that many people are opting into automatic enrollment for target date funds. When we talk to target date funds participants, they all seem to believe that they are going to get lifetime income from the target date forward. That, in fact, is not what happens. It doesn’t mean that you’re suddenly going to get checks.

BE:  From your vantage point, one challenge is behavior, another is mindset, and then another challenge is education. How do these factors change with age?

GARNICK: I think the moment of retirement marks an incredibly important pivot point for every single American. However, our ability to make decisions clearly declines over time. As we get older, we’re not thinking as quickly. We supplement that with experience. It’s when you have your best thinking that you should [develop a plan for] lifetime income.

I think that’s incredibly important. The retirement system changed and generations to come still demand a paycheck in retirement. Now, more than ever, as we work longer, people need to put their best thinking forward and make sure they get guaranteed lifetime income while they can.

BE: As individuals and families go through this retirement process, what strategic advice would you share with them?

GARNICK: No. 1, I tell this to millennials all the time: Save now or die trying. So many of them say, “I’ll start later once I have [taken care of my] students loans.” You have to start saving now. No. 2, people are anything but average. Calculating how much money you need to save today so that you can live the same lifestyle in retirement is an incredibly complex task. it can’t possibly be right that the amount that a company says you should save for retirement is correct for everybody. Don’t rely on the average. Financial planning plays a huge role. No. 3, I would say [keep working toward] guaranteed lifetime incomes. We always want financial security as we age and longevity gets longer and longer.