How advisers can get Gen Yers to take some risk
Young investors' conservative investing mindset will work against them in saving for retirement.
Generation Y (age 18-34) is very concerned about the future of Social Security and has a strong desire for other sources of guaranteed income, such as annuities, to provide secure monthly income in retirement.
That’s according to a new study released by TIAA-CREF that included seven questions on retirement. The survey polled roughly 1,000 respondents, age 18 and older.
The survey showed that Gen Y has taken on a pragmatic view of retirement, realistic assumptions about their longevity, and a desire for less risky investments.
“Gen Y tends to be more guarded and cautious with their retirement savings but it is surprising how many want to put money into lifetime income sources,” said Amy Podzius, director of TIAA-CREF’s field consulting group.
While Gen Y takes a conservative view of their retirement security, some areas raised great concern. More than 30% of Gen Y respondents reported that they were not saving anything for retirement. The percentage of nonsavers was much higher for Gen Y than for other age groups. The lack of saving is a real problem, especially because Gen Y does not expect to rely upon Social Security at the same level as past generations. For instance, only 56% of Gen Y respondents stated they are counting on Social Security to provide income in their retirement, compared with 76% of 35- to 44-year-olds and 73% of 45- to 54-year-olds.
FEAR OF RISK
Perhaps most important is what Gen Y wants for retirement. Nearly 34% of Gen Y respondents stated their primary goal for retirement would be to ensure the safety of their savings regardless of what happens in the market. Gen Y appears to be more concerned about market risk than previous generations, with a strong desire for guaranteed monthly income in retirement. Nearly 42% of Gen Y respondents stated their primary retirement goal is to have sufficient guaranteed monthly income to cover their living expenses in retirement.
This desire to avoid market risk with guaranteed income should be welcome news for any annuity provider. Of any age group in the survey, Gen Y demonstrated the largest desire to purchase an annuity, with nearly 14% stating they had already purchased an annuity and 16% stating they plan to purchase an annuity before retirement. While only 26% of Gen Y respondents stated being familiar with annuities, an astonishing 61% of Gen Y respondents stated they would be willing to commit a portion of their retirement savings that would allow them to receive a monthly income for life.
While negative sentiments toward annuities exist, expanded company product offerings, more research demonstrating the strategic uses of annuities and increased government support have solidified a place for annuities in retirement planning. A deferred-income annuity, which pays lifetime income starting later in life, can be a great retirement income planning tool for Gen Y. New government regulations have furthered the applicability of annuities in retirement planning by allowing for 401(k) and IRA participants to buy a longevity annuity, often referred to as a QLAC, using funds from their retirement plan.
According to David Littell, a professor of retirement at The American College, “Diverting a portion of savings to retirement income through the purchase of a deferred-income annuity could meet Gen Y’s desire for both guaranteed income and avoidance of risk. But this leads to the difficult questions of what is the right age to start buying income and how much of savings should be devoted to an annuity.”
The lack of savings is troubling for Gen Y, but when combined with a conservative investment approach, it could spell disaster for meeting their future financial goals. Gen Y needs specialized help to utilize the guaranteed income solutions they want to incorporate into their retirement income plans.
FINANCIAL EDUCATION
“When dealing with Gen Y clients, it is not about leading with retirement planning,” Ms. Podzius said. “Instead, it is about leading with holistic planning and education. I can’t think of a Gen Y client who didn’t change their thought process when they learned more about risk, mutual funds and other financial topics.” Financial education is the key to helping clients create a secure retirement, and Gen Y is no exception.
Jamie Hopkins is a professor of tax in The American College’s Retirement Income Certified Professional program. Follow him on Twitter @jamiehopkins521.
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