Retirement is one of the most daunting financial milestones for most people. One recent survey found that 56% of Americans feel behind on saving for retirement, especially as the cost of living increases and the future of government programs is uncertain, leaving future retirees with the very real risk of saving but not having enough.
To fight the stress, many Americans — especially those in younger generations — are starting to save for retirement earlier. Gen Z, born between 1997 and 2012, is investing earlier than other generations, with 66% already saving for retirement.
This new retirement landscape, which combines early savers with older stressors, leaves advisors in a unique situation. Here’s how to help clients save for retirement earlier to prevent stress later in life.
Understand Their Finances and Mindset
Many factors affect how a person views money, especially the market situation during their formative years and the major events they’ve lived through. While it’s important not to treat all people from a generation the same because of their age, having a basic understanding of their general mindset and approach to finances and retirement can set the foundation for creating a personalized retirement plan.
Baby boomers, or the generation now entering retirement, started saving at an older age. The majority (85%) have employer-sponsored retirement plans, but 41% expect to rely on Social Security as their primary source of retirement income. As retirement comes closer for baby boomers, many are pushing it off — 49% expect to work past age 70 or not retire for financial or health-related reasons.
On the other end of the spectrum are millennials and Gen Z, who are further from retirement and in the earlier stages of their savings journeys.
Millennials entered the workforce during uncertain economic times, which delayed the start of their retirement savings. Nearly 80% have a 401(k) or similar account but are only setting aside 12% of their annual salary on average. Millennials are in the thick of things, with many serving as caregivers to children or aging parents while also dealing with mental health concerns, a pandemic, and a challenging economy.
Gen Z may be the youngest in the workforce, but they started saving the earliest — at age 19 on average. And while Gen Z saves more of their annual income (20%) than millennials, the balances of their retirement and savings accounts are lower because of their age. Even with their early savings, Gen Z is concerned about finances, with more than half struggling to make ends meet and having a side hustle.
Know Their Retirement Goals
The biggest benefit to starting saving for retirement earlier is to spread out the investment, meaning investors are putting in less money but doing it for longer. Over time, they may be investing or saving the same amount of money, but saving less per month by starting earlier.
To help clients reach their goals, whether they have 50 years until retirement or 15, start with the end in mind: how much money do they actually need to retire? What are their retirement goals, and how much do they expect to live on? At what age do they expect to retire? Having honest, transparent conversations with your clients about what they expect from retirement and how much they’ll need to save will put you on the same page and give them a realistic expectation of what it will take to reach their goals.
The cost of retirement is increasing, but the current average in the U.S. for retirement expenses is $835,453 for 25 years and $1,003,548 for 30 years. Of course, those numbers can vary dramatically based on where a person lives, their family situation, and their lifestyle. A 25-year retirement in Hawaii, for example, costs more than $2 million, while a similar retirement in West Virginia costs less than $700,000.
Share Risks and Options
When clients start saving for retirement earlier, they have more flexibility to take risks with their investments and potentially earn big rewards from a higher-risk product. This matches younger generations like Gen Z, which are more open to risk. However, don’t naturally assume a younger client wants to take risks in their retirement savings.
As you build a relationship with your client, you can gauge their risk tolerance and help them find the right accounts and products to match their goals and comfort level. The PreciseFP risk tolerance questionnaire can be a great place to start the conversation.
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