Data & Research August 28, 2012

Gens X and Y Beat Boomers in Retirement Saving

Nearly 60% of Gen X (59%) and Gen Y (56%) are automatically saving for retirement, compared with 46% of Baby Boomers, a survey found.

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The younger generation is also more eager to get started on their retirement savings; the average Gen X’er, or those age 36 to 47, and Gen Y’er, or those 23 to 35, got a running start on their retirement nest egg in their mid 20s. By comparison, the average Boomer, aged 48 to 66, began saving for retirement at 35, according to a survey by TD Ameritrade.

“Gen X and Y have accepted the reality of the past few years, and rather than being discouraged, they are using what they’ve witnessed to their advantage by saving earlier and regularly,” noted Carrie Braxdale, managing director, investor services at TD Ameritrade Inc., a broker/dealer subsidiary of TD Ameritrade Holding Corporation. “The hope is that tomorrow’s investors, Gen Z, follow suit as they near retirement.”

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Only 8% of Gen Z, who are between the ages of 13 and 22, are saving for retirement, although 41% think that is never too early to begin saving for retirement. Conversely, 71% of the parents of Gen Z agreed with the statement that it is never too early to begin saving for retirement. However, 56% of Gen Z has a savings account, attributing this mainly to conversations with their parents. Eighty-two percent of Gen Z’ers whose parents have spoken about the importance of saving say the talk has been about saving in general. For 67%, the talks have been about saving for college, while the parents of 38% have spoken to them about retirement savings in particular.

The conversations appear to be having an impact, as only 35% of Gen Z say they expect to count on Social Security by the time they retire. Sixty-one percent of the parents of Gen Z, on the other hand, are counting on Social Security. Thirty-nine percent of Gen Z expects an inheritance and think that they therefore will not need to save for retirement, but only 16% of the parents of Gen Z think that the estate they leave their children will set them up adequately for retirement.

TD Ameritrade believes that while Gen Z has some appreciation for the need to accumulate a retirement portfolio, they could use more coaching. As Braxdale put it: “The good news is that Gen Z is starting off with a good understanding of the importance of saving. But that doesn’t mean they should wait to become more educated on proper long-term savings habits. We encourage parents to talk to kids specifically about retirement savings to ensure they understand the importance of getting a head start and taking advantage of the power of compounding.”

TD Ameritrade offers a number of retirement planning resources, including a “Cost of Waiting” calculator, on its website, available here.

Data & Research August 27, 2012

Retirement Income Measures Should Adapt to Changing Landscape

A report published by the Social Security Administration (SSA) contends the Census Bureau should adapt its retirement income measures to the changing retirement landscape.
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According to “Shifting Income Sources of the Aged,” the Census Bureau’s Current Population Survey (CPS)—one of the primary sources of income data—greatly underreports distributions from defined contribution (DC) plans and individual retirement accounts (IRAs), posing an increasing problem for measuring retirement income in the future. While the CPS shows current retirees still receive significant retirement income from defined benefit (DB) plans, the data also indicated DC and IRA balances for those not retired is increasing.  

The CPS measures IRA distributions as money income if they occur “regularly,” like annuity payments. However, because most IRA distributions are irregular, they are not measured as income in the CPS, the report says. In addition, very few DC plan participants take their retirement distributions as annuities.   

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Excluding periodic (irregular) distributions misses much of the money distributed from IRAs and DC plans that supports retirement consumption. As retirees increasingly rely on periodic distributions from DC plans and IRAs, the problem of underreporting pension income in the CPS could become increasingly serious, the report authors contend.

 

 

(Cont...)

As an example, the report notes that the CPS recorded withdrawals of only $6.4 billion from IRAs in 2006, while the Federal Reserve Board’s Survey of Consumer Finance (SCF) recorded $95.2 billion and an Investment Company Institute (ICI) survey recorded $71.6 billion. From 2006 tax records, all tax returns recorded $124.7 billion in distributions from IRAs, and tax returns for primary taxpayers ages 55 and older recorded $105.7 billion in distributions.  

An ICI report from 2009 said of the CPS: “While IRA withdrawals have risen in importance as a source of retirement income, the most widely cited income measure has failed to capture that growth. Looking ahead, that trend is likely to continue.” According to the SSA report, that measurement gap applies to money withdrawn from all tax-qualified retirement savings plans, not just IRAs.   

“The major nationally representative surveys of household income must accurately measure annual distributions from retirement accounts in order to provide a complete picture of the economic well-being of the aged and the general U.S. population. That may require the survey questions to be revised to inquire more directly about distributions from retirement accounts, whether taken as lump sums, regular distributions or irregular periodic withdrawals,” the authors conclude.  

The report is here.

 

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