Retirement Readiness of Generation X An Overview of the Next Generation of Retirement Investors January 2012
About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI s mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.irionline.org today to experience the vast resources of the Insured Retirement Institute for yourself. All rights reserved. No part of this book may be reprinted or reproduced in any form or used for any purpose other than educational without the express written consent of IRI.
Overview Much of the research in the retirement planning industry has focused on the needs of Baby Boomers. While the 79 million strong Boomer population undoubtedly requires retirement income advice now and in the coming years, there are another 70 million Americans right behind them Generation X (Gen X). As such, the Insured Retirement Institute (IRI) has embarked on a large-scale analysis of Americans in their 30s and 40s, thereby including Generation X and the youngest Boomers. In this report, we share a key portion of this research the preparations they are making for retirement, and the issues that are shaping these expectations. Key Findings and Analysis Although their collective retirements are decades away, there are a number of compelling reasons for Generation X and their advisors to begin the retirement planning process early. o Among GenXers who pinpointed an anticipated retirement age, the average age was 64, indicating a retirement period of more than 20 years. o Only one-third of GenXers are at least very confident of having enough money to live comfortably during retirement, cover their medical expenses, and pay for their children s higher education. o Just 41% of GenXers have tried to figure out how much money they will ultimately need to save. And, among those who have saved, half have amassed less than $100,000. o The economy has played a significant role in how GenXers shape their retirement expectations. Overall, many GenXers felt the sting of the recession, as 15% made early withdrawals from their 401(k) plans, 23% stopped contributing to their retirement accounts, and 22% stopped contributing to college savings plans. Single GenXers, women and those on the cusp of the Boomer Generation are in particular need of guidance in planning for retirement. o Approximately 21% of older GenXers and younger Boomers in this group needed to dip into their retirement savings plans in the past year. o 54% of female GenXers rated themselves as having little to no investment knowledge; this compares to 37% of male GenXers. o Only 24% of single GenXers indicated that they were at least very confident that they would have enough savings to fund their lifetime retirement needs, compared to 40% of married GenXers. On the other end of the scale, 35% of single GenXers expressed little to no confidence about having enough money for their retirement, compared to 20% of married GenXers. Presently, 37% of GenXers have consulted a financial advisor. Among single GenXers, this figure is 20%. IRI defines Generation X as Americans born from 1965 through 1981, inclusive. o The Generation X population numbers 70 million; including the youngest Boomers brings this figure to 83 million.
o Generation X, as a group, is educated (one third have at least a Bachelor s degree), own their own homes (at least 70% of married couples), and work in professional occupations (more than 40%). Who is Generation X? There are various accepted boundaries that define the age group dubbed Generation X. IRI recognizes GenX as the 70 million Americans born from 1965 through 1981, inclusive, a population that turned ages 30-46 in 2011. Additionally, this report includes late-stage Boomers those born from 1962 through 1964, as their views and experiences tend to align with those of the earliest GenXers. This range enabled us to do a complete analysis of Americans who are in their 30s and 40s. For this report, we segmented GenXers into three groups, by age, as follows: Young GenXers: Those born during the five-year period from 1977 through 1981, who were between ages 30 and 34 in 2011. The year 1977 is used by some demographers to differentiate between Generations X and Y. Core GenXers: Those born during the ten-year period from 1967 through 1976, inclusive, who were therefore between ages 35 and 44 in 2011. Hybrid Boomers: Those born during the five year-period from 1962 through 1966. This group, who were between ages 45 and 49 in 2011, is somewhat evenly divided between the youngest Boomers and the oldest GenXers. For ease of presentation, this report refers to all three groups collectively as Generation X. Generation X segmentation Birth Years Age in 2011 Population (millions) Hybrid Boomers 1962-1966 45-49 22.7 Core GenXers 1967-1976 35-44 41.0 Young GenXers 1977-1981 30-34 20.0 Source: United States Census, 2010, Insured Retirement Institute Generation X, as a group, is educated, own their own homes, and work in professional occupations. In its Demographic Profile of America s Gen X, the MetLife Mature Market Institute includes the following statistics. (Note that MetLife classifies Gen X as those born between 1965 and 1976.) 2
Selected Traits of Generation X Education Master s Degree or Higher 11% males / 12% females Bachelor s Degree 21% males / 22% females Some College 25% males / 29% females High School Graduate 31% males / 26% females Less than High School 13% males / 10% females Family Married 65% males / 67% females Divorced or Separated 13% males / 16% females Widowed 0.3% males / 1.1% females Never Married 22% males / 16% males Home Ownership (among Married Couples) Age 30-34 70% Age 35-39 79% Age 40-44 84% Home Ownership (among Singles Living Alone) Age 30-34 36% males / 34% females Age 35-39 44% males / 45% females Age 40-44 47% males / 50% females Occupation Group Management, Professional, and Related 35% males / 44% females Sales and Office 15% males /29% females Service 12% males / 20% females Construction and Maintenance 19% males / 1% females Farming, Fishing and Forestry 1% Other 6% - 18% Median Household Income (2008, Married Couples) Age 30-34 $73,601 Age 35-39 $81,107 Age 40-44 $84,278 Median Household Income (2008, Singles Living Alone) Age 30-34 $37K males / $39K females Age 35-39 $40K males / $40K females Age 40-44 $40K males / $32K females Source: MetLife Mature Market Institute 3
Future Age Generation X and Retirement Although their collective retirements are decades away, there are a number of compelling reasons for Generation X and their advisors to begin the retirement planning process early. The key reason is simply life expectancy. Among the 70% of survey respondents who pinpointed an expected retirement age, the average was approximately 64 years old. When we employ life expectancy tables, this corresponds to a retirement period that will span more than 20 years. 90 85 80 75 Life Expectancy vs. Anticipated Retirement Age, Generation X and Late-Stage Boomers Average life expectancy - Female Average life expectancy - Male Anticipated retirement age 70 65 Generation X Late-stage Boomers 60 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 Current Age Average life expectancies determined using Social Security 2010 tables with 1% mortality improvement. Anticipated retirement age based on IRI consumer survey, November 2011; averages are shown for age groups 30-34, 35-44, and 45-49 for those who specified an age at which they expect to retire. Although GenXers have been saving money for retirement, the end goal is still filled with unknowns. Our research shows the following key themes regarding retirement savings and planning. Low Retirement Confidence Yet, even with these strong profiles, there is concern among Generation X about their ability to meet future expenses in retirement. According to IRI s survey, only one-third of GenXers are at least very confident of having enough money to live comfortably during retirement, cover their medical expenses, and pay for their children s higher education. 4
Confidence in Meeting Retirement Expenses, Generation X Will have enough money to live comfortably throughout retirement years 35% 43% 20% Will have enough money to take care of medical expenses during retirement 34% 40% 23% Will have enough money to pay the cost of higher education for children 32% 28% 32% 8% Will have enough money to pay for my/our long-term care expenses 28% 35% 33% Will have enough money to pay for long-term care for parents 21% 26% 44% 9% 0% 20% 40% 60% 80% 100% Extremely or very confident Somewhat confident Not too/not at all confident Not sure Medical expenses include those incurred for doctor visits, prescription drugs, and hospital stays; excludes the cost of long-term care. Long-term care expenses include those incurred in a nursing home or for home health care. Response rates of 3% or less are not labeled. Survey population: Americans currently age 30-45. Source: Insured Retirement Institute These findings were fairly consistent by age and gender. Differences between income groups were as expected, with higher levels of confidence in households with higher incomes. Yet, there was a notable distinction between GenXers who were married and those who were not. Using overall retirement income confidence as the example, nearly 40% of married GenXers indicated they were at least very comfortable that their savings would take them through retirement, compared to only 24% of single GenXers. On the other end of the scale, less than 20% of married GenXers expressed little to no confidence about having enough money for their retirement compared to 35% of single GenXers. As noted earlier, a substantial proportion of GenXers have never married, and their assertion that they are not confident about retirement opens up opportunities for advisors to assist them. 5
Confidence in Having Enough Money to Live Comfortably Throughout Retirement, Generation X, by Marital Status 16% 44% 38% 35% 39% 24% Not sure Not too/not at all confident Somewhat confident Extremely or very confident Married Not Married Insufficient Savings First, while three-quarters of GenXers have money saved for retirement, only 41% have tried to figure out how much money they will ultimately need to save. Among those who have saved, many have set aside an insufficient amount. As shown below, half of GenXers have saved less than $100,000. Amount Saved for Retirement, Generation X $200,000 or more 13% Don't know/refused to answer 26% $100,000- $199,999 12% Less than $50,000 30% $50,000-$99,999 19% Survey population: Americans currently age 30-49 who have saved money for retirement. 6
Not surprisingly, the amount of money saved for retirement increases with the age of the individual. As noted, one-third of Americans between ages 45-49 have saved at least $100,000, including 25% whose retirement savings are $200,000 or more. It is also not a surprise that lower-income GenXers have smaller amounts in retirement savings. Still, just 40% of those earning at least $75,000 annually have at least $100,000 in savings. Amount Saved for Retirement, Generation X, by Age 22% 25% 26% 9% 13% 23% 21% 14% 11% 18% 18% 46% 30% 22% Don't know/refused to answer $200,000 or more $100,000-$199,999 $50,000-$99,999 Less than $50,000 30-34 35-44 45-49 Amount Saved for Retirement, Generation X, by Household Income 15% 17% 19% 5% 7% 22% 20% 18% 80% 53% 22% 20% Don't know/refused to answer $200,000 or more $100,000-$199,999 $50,000-$99,999 Less than $50,000 <$30K $30K - $74K $75K+ 7
We also noted small differences in savings patterns between genders with one clear caveat. Onethird of female GenXers (married and unmarried, combined) were uncertain as to the amount of money they had saved for retirement. Past IRI research shows that women are very highly involved in the management of household finances. This is an indication that greater attention needs to be paid to retirement savings. Amount Saved for Retirement, Generation X, by Gender 18% 33% 17% 10% 14% 10% 22% 15% 29% 33% Don't know/refused to answer $200,000 or more $100,000-$199,999 $50,000-$99,999 Less than $50,000 Male Female That said, there is a notable difference in the retirement savings patterns of GenXers by marital status. Overall, more than half (52%) of single GenXers have retirement savings of less than $50,000. While we would expect the level of savings to be less than that of married GenXers, this level is still quite low. However, the savings levels of married GenXers are also insufficient, even more so when compared to patterns seen among their unmarried counterparts. 8
Amount Saved for Retirement, Generation X, by Marital Status 28% 14% 12% 12% 8% 10% 17% Don't know/refused to answer $200,000 or more $100,000-$199,999 19% 27% 52% $50,000-$99,999 Less than $50,000 Married Not Married The Recession The economy has played a significant role in how GenXers shape their retirement expectations. Overall, many GenXers felt the sting of the recession, and few were immune. Many GenXers had to make the decision to cut back on their retirement savings, as 15% made early withdrawals from their 401(k) plans, 23% stopped contributing to their retirement accounts, and 22% stopped contributing to college savings plans. This trend was particularly evident among older members of Generation X. Most interesting is that 21% in this group needed to dip into their retirement savings plans, more so than younger members of Generation X. Of course, their account balances were larger, on average, yet this finding illustrates the need for more immediate retirement advice to this group of individuals. 9
Impact of Recession on Retirement Planning, Generation X, by Age 28% 15% 21% 20% 21% 17% 22% 23% 10% Prematurely withdrew funds from 401(k) Stopped contributing to 401(k) or IRA Stopped contributing to college savings plan 30-34 35-44 45-49 Also of note is that single GenXers withdrew funds from their retirement savings at a much greater rate than married GenXers. As discussed earlier, this indicates a greater need for retirement savings advice among GenXers who are not married. 10
Impact of Recession on Retirement Planning, Generation X, by Marital Status 34% 16% 12% 19% 22% 20% Prematurely withdrew funds from 401(k) Stopped contributing to 401(k) or IRA Stopped contributing to college savings plan Married Not Married Impact of Recession on Retirement Planning, Generation X, by Gender 25% 20% 21% 23% 15% 15% Prematurely withdrew funds from 401(k) Stopped contributing to 401(k) or IRA Stopped contributing to college savings plan Male Female 11
Impact of Recession on Retirement Planning, Generation X, by Household Income 37% 28% 30% 30% 22% 20% 11% 18% 15% Prematurely withdrew funds from 401(k) Stopped contributing to 401(k) or IRA <$30K $30K - $74K $75K+ Stopped contributing to college savings plan Investment Guidance Needed GenXers will need to rely more on investment acumen than Americans in earlier generations. According to the Employee Benefit Research Institute (EBRI), only 15% of today s workers are covered by a defined benefit plan. Additionally IRI research shows that 56% of GenXers expect their 401(k) plans to provide a major source of retirement income, thereby requiring investment expertise to make the plan s value stretch over more than two decades of retirement. Yet, while nearly 4 in 10 GenXers believe they are somewhat knowledgeable about investing, only 16% rate themselves as savvy investors, and 45% assess their investment knowledge as low to none. 12
Knowledge About Investing, Generation X 38% 27% 13% 18% 3% Extremely knowledgeable Very knowledgeable Somewhat knowledgeable Not very knowledgeable Not at all knowledgeable The above results do not vary by age, yet there are some notable differences by gender and marital status. Knowledge About Investing, Generation X, by Gender 54% 41% 35% 37% 22% 11% Extremely or very knowledgeable Somewhat knowledgeable Not knowledgeable Male Female 13
Knowledge About Investing, Generation X, by Marital Status 56% 41% 42% 29% 17% 15% Extremely or very knowledgeable Somewhat knowledgeable Not knowledgeable Married Not Married Additionally, GenXers are likely to value performance, rather than guarantees, when selecting a retirement investment product. The top three traits that GenXers deem most important are rate of return (24% of survey respondents), guaranteed income (19%), and past performance of the investment (14%). Principal protection is of low priority (11%). Therefore, GenXers need some guidance in how to supplement their desire for strong returns with investments that provide longterm stability. 14
Most Important Trait in a Retirement Investment, Generation X Rate of return 24% Guaranteed monthly income 19% Past performance Advisor recommendation Don't know Principal protection 14% 12% 11% 11% Other 8% The combination of GenXer s investment confidence and their emphasis on performance would indicate a strong need for a financial advisor to provide guidance in retirement planning. Yet, only 37% of GenXers have consulted a financial advisor. As in prior analyses, the most common differentiator (other than household income) is marital status. While 42% of married GenXers have consulted an advisor for retirement planning, only 20% of single GenXers have done so. No difference was noted when segmenting by gender, despite the lower general investment confidence cited by women. Conclusion It is clear from IRI s research that it is not too early to advise Generation X on retirement income planning. Presently, 37% of GenXers have consulted a financial advisor to help them plan for retirement. Yet, the concerns expressed by GenXers give indication that this number needs to increase. Even so, advisors must use caution to not paint all GenXers with the same brush. GenX, while sharing many characteristics, also have different financial needs depending upon their situation in life. Core GenXers those born between 1967 and 1976 need additional guidance on building their retirement nest eggs (30% have saved less than $100,000), and the pitfalls of suspending 15
contributions to retirement and college savings plans. Hybrid GenXers those born between 1977 and 1981 need to be given the impetus to start saving for their future. Younger Boomers and the oldest GenXers those born between 1962 and 1966 must not get overlooked when servicing the general Boomer population. Although their retirement savings accounts are higher, these investors have also needed to dip into them at higher rates than have younger investors. Special attention must also be paid to GenXers who are not married and those in middle income bands to address their financial needs for retirement. These groups tend to have less money saved for retirement, and are the most likely to have used their savings for present needs. Methodology The Insured Retirement Institute (IRI) commissioned Woelfel Research, Inc. to conduct a survey to determine how retirement is viewed by individuals in their 30s and 40s. The research was conducted by means of telephone interviews with 802 adult Americans ages 30-49. The sample was selected from a list of households in this age group, developed by Accudata, Inc. by compiling data from available sources such as motor vehicle records. Results were weighted by age and gender to the 2010 United States Census. Data was collected from November 10-22, 2011, and analyzed by IRI in December 2011. The margin of error for the sample of 802 was ±3.5%. 16