Examining Financial Wellness Needs of Each Generation

A Financial Finesse analysis of financial wellness assessments completed in 2015 found that employees with higher financial wellness scores—as measured on a 10.0 scale—also had higher contribution rates to an employer-sponsored retirement plan.

Specifically, employees with a financial wellness score of 4.0, 5.0, and 6.0 had an average deferral rate of 6.57%, 7.38%, and 8.37%, respectively.

Using this data, Financial Finesse estimated the potential increase in retirement plan balances for a Millennial employee making $50,000 a year that improves on a 4.0 financial wellness score. For example, changes in financial behavior that cause a one-point improvement could potentially increase their retirement savings by over $100,000, or by more than 12%, in 40 years. Changes in financial behavior that cause a two-point improvement could potentially increase their retirement savings by more than $260,000, or by more than 27%, over that same period of time.

Liz Davidson, founder and CEO of Financial Finesse in El Segundo, California, tells PLANSPONSOR this is significant not only because it quantifies the idea that financial wellness helps retirement preparedness, but that financial wellness can especially help Millennials because they have more time.”

Financial Finesse’s Generational Research report says financial wellness programs help employees overcome two key biases: “present bias,” the tendency to value satisfaction today over future satisfaction, and “exponential growth bias,” the tendency to neglect the value of compounding.

While all generations can benefit from basic money management, debt reduction, and retirement education, each generation learns differently and has different challenges.

Financial Finesse’s research found Baby Boomers need help in four particular areas:

• Prioritizing their retirement before helping loved ones;
• Budgeting to reduce debt and save more to close the retirement gap;
• Better managing their investments as they get closer to retirement; and
• Planning for long-term care costs.

To help Baby Boomers prioritize their retirement before helping loved ones requires holistic financial planning, Davidson says. “We do a late-career workshop to help them with competing priorities. We help them understand why retirement is a top priority—you can’t get financial aid or a loan for retirement. If you put college planning first, your child may have to help you in retirement.”

Davidson adds that having in person, one-on-one planning sessions is very important to help them create an action plan for prioritizing financial obligations and figure out some trade-offs working with what they have.

According to the research report, Boomers tend to be more traditional in their communication preferences. Since they didn’t grow up with as much educational technology, they’re more used to learning from their own experiences and may be drawn more to situations in which they can share those experiences and learn from others. They may be reached most effectively with a combination of interactive group workshops, written materials, and especially one-on-one personal communication with a financial planner. The latter may be particularly important when it comes to making crucial pre-retirement decisions like how to invest as they approach retirement, how to take retirement plan distributions, which pension option to choose, when to start collecting Social Security, how to pay for potential long-term care costs, and how to plan for their estate.

According to the research, Generation X needs help with:

• Reversing the decline in money management;
• Making sure they have adequate insurance and estate planning protection; and
• Translating their growing retirement and investing awareness into more saving and better investing.

To help Gen X reverse the decline in money management, having an ongoing financial helpline coaching program is helpful, says Davidson. “They tend to be self-service, so they can make calls on their own volition. It’s also important for them to work with the same person; it takes trust building for this generation to buy into what they are being told.”

According to Davidson, debt is one of most common topics Gen X calls planners about. Planners can help them with strategies to get out of debt, to establish an emergency fund to avoid debt, and then save for retirement.

Davidson notes that, while Gen X may be small in number, they are a particularly vulnerable group, and the industry needs to pay more attention to this generation Millennials have more access to financial wellness tools online and through employers, and she thinks they will have more access to free advice; Baby Boomers are likely to get full Social Security, and they may have pensions; but Gen X got planning tools late and most have no pension and they may face lower Social Security payouts. She says she’s notice a “barbell” of targeted messaging, focusing more on Millennials and Baby Boomers.

Many members of Generation X notoriously grew up as “latch key” kids and developed a strong sense of self-reliance, a pragmatic outlook, and a cynical suspicion of authority. They prefer to do their own research online before speaking with a professional and to choose from among options rather than being told what to do. Finally, Generation X is currently in a stage of life with competing demands on their time from work and family. All of this adds up to a need for a multi-channel educational approach incorporating both online tools they can use on their own and on-demand personal help from an unbiased source.

The research found Millennials need help in two main areas:

• Maintaining and strengthening their money management skills to avoid the same fate as Generation X. Fortunately, they will have access to technologies and financial wellness programs that the previous generations didn’t have.
• Giving greater priority to the importance of longer term goals like retirement planning and investing. Once they do so, they’re likely to take advantage of a host of technologies like retirement calculators and robo-advisers that can help them just as they do with their credit.

As far as giving greater priority to the importance of longer term goals like retirement planning and investing, Davidson says Financial Finesse has found that with Millennials, even the word retirement is becoming somewhat obsolete, for several reasons. With medical advances, this generation may not suffer some diseases, and will have longer, more productive life expectancies, so retirement is a blurry line. Because Millennials' retirement may potentially change to different types of working or a phased approach, Millennials don’t relate to the stop-working concept.

“What they do relate to is living life on their own terms—flexibility and freedom to live the life they want to live,” she says. “Plan sponsors and advisers should talk to them about financial freedom—from not being tied to a specific job so they can pursue their own interest, to the level of ‘You're good for the rest of your life, so you don’t need a job for income, you can do one for love or volunteer or start your own business’ The message is about creating the life they want as opposed to saving for retirement.”

Millennials are drawn to technology, working in groups, and having fun while learning. They also tend to have shorter attention spans, so breaking up messages may be more effective. Online tools, group workshops, and programs that incorporate aspects of gamification are generally most attractive to them. It’s also important for them to see how their actions can lead to real results, both in the long and short term, and to receive immediate and ongoing feedback. For this reason, online tools that track their progress and ongoing coaching can be beneficial.

One thing that struck Davidson about the research is that across generations, there is an increase in people knowing their numbers—credit scores, how much is needed for children’s college education, projections for how much they need in retirement. “It shows how new tools and technology are making a difference.

The full Financial Finesse Generational Research report is here.