Sandra J. Bailey, LACP, AU, AINS
Millennials, Generation X and Baby Boomers
Let’s start by looking at the retirement savings vehicles that each generation may consider as everyone must decide which plan is best for them.
Many are unaware that Congress established two retirement systems in America.
- Qualified Plans: Most are familiar with 401(K), 403(b), 457 and IRAs. Congress imposed maximum limits one can contribute, and it must be offered to All employees. Taxes are deferred until retirement.
401(K) Plans: Maximum Contribution for 2018 is $18,500 annually (Established 1978)
Defined Benefit Plans (DB), Pensions. (Established in 1875)
- Non-Qualified Plans: Made available only to “Top Hat,” highly compensated or key employees. There are no imposed contribution limits on a pre-tax basis. Owned by Corporations and Banks. (Established in the 1940s)
- Personal Owned Non-Qualified Plans: Allows the average person to use the same vehicle executives use to fund their non-qualified deferred compensation plans. For many, it will generate 25% to 30% more income without putting your money at risk.
Let’s look at the wobbly three-legged stool that consists of a Pension, Social Security and Personal Saving and determine ways to fix it.
According to the Transamerica Center for Retirement Studies:
- 78% of workers are concerned that Social Security will not be there when they retire.
- 51% of workers agree that they are building a large enough retirement nest egg
- 65% believe they could work until age 65 and not save enough to meet their needs.
Now let’s look at each generation!
Millennials (born 1979 – 2000, Age 17-38)
Millennials are now the largest and youngest generation in the workplace. 55% are self-funding their retirement as they are the do-it-yourself generation, including 43% relying on their 401(k) & IRAs while 12% are using other investments. Only 17% expect social security to be their source of retirement income. Their average total household retirement savings is $31,000.
Roth IRA: Maximum Contribution for 2018 is $5,500 for Millennials.
72% of millennials started saving as early as age 22 due to auto enrollment, direct pay or drafts. They contribute 7% of their annual pay with a very impressive 30% contributing 10% or more.
Millennials are making retirement planning a topic of conversation as 75% say they would like more information and advice on how to achieve their goals. They should consult an advisor. Some are fee based and others offer free consultations.
This is the absolute best generation to start planning due to their time horizon and compound interest. As Albert Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it. . . he who doesn’t… pays it.”
Let’s look at a 22-year-old, $35,592 annual salary, saving 7%, retiring at age 65.
- Qualified Retirement Plan at Age 65 = *$25,619 annually
- Non-Qualified Retirement Plan at Age 65 = $65,309 annual income
*Although 7% rate of return was used in calculating the Qualified Plan, most actually earned 6% based on the ups and downs of the stock market. (Based on 4% withdrawal rate established by financial professionals)
Generation X (born 1965-1978, Age 39-52)
Generation X is the 401(k)-experiment generation as they are the first to have access to 401(k) plans. 77% started saving at age 28 and contribute an average of 7% of their annual salary.
Unfortunately, they are struggling with retirement saving. 30% have taken loans or early withdrawals to pay off debt or unplanned expenses as they have little or no emergency savings.
Generation X is considered the sandwich generation for taking care of their children and their parents while working a job. They feel they can’t afford to invest in retirement now as 40% say they can wait until they are closer to retirement to start saving.
They are concerned with Long Term Care and having adequate life insurance to leave a legacy.
Generation X total savings is an average of $69,000 and only 12% feel confident in their retirement plans. They are behind but can get back on track and catch up with proper planning and focus. 60% say they have a strategy. 16% have a written plan. 44% say they have a plan but it’s not written down.
Let’s look at a 45-year-old, $50,400 annual salary, saving 10%, retiring at age 65.
Qualified Plan: Starting with $69,000 = $17,000 annually
Starting at zero now = $8,600 annually
Non-Qualified Plan: Starting at zero = $16,002 annually
Roth IRA: Maximum Contribution for 2018 is $5,500. Age 50 and older $6,500 annually
Baby Boomers (born 1946 -1964, Age 53-71)
Baby Boomers are a large and dynamic generation (the Bankers Life Center for a Secure Retirement). This generation is transitioning from pensions for retirement to an increasing amount of individual responsibility.
About 4 and 10 (39%) Boomers identify themselves as retired even though most have not done enough to adequately prepare for retirement. 66% is working past age 65 and do not plan to retire at all. 87% expect social security to be a source of their retirement while 34% expect it to be their primary source.
Americans are living longer and healthier. However, it is estimated that the cost of health insurance in retirement is over $264,000. Boomers are concerned about long term care, outliving their income and afraid there won’t be enough to live on. Consider these options:
- Join the 66% of Boomers and continue working even if part time. Medicare isn’t available until Age 65 and once retired, every day is Saturday!
- Consider when you will receive your social security benefits. Boomers will receive 100% at age 67, 70% at age 62 and 124% at age 70. Be sure to set up your “My Account” at SocialSecurity.gov.
- Pensions from prior jobs: Some pensions can be accessed now and used to generate additional retirement income. Example: Pension at Age 57 would generate $300 monthly income, at Age 70, $570. Use the $300 now to fund a life insurance supplemental retirement plan. At age 70, the plan would generate $503 monthly plus you’re still receiving the $300 from the old pension. Total income is $803 monthly instead of $570. The plan will include Long Term Care, Critical Illness and a Legacy benefit.
- Old 401(k) Plans can be rolled over to generate additional guaranteed retirement income.
In conclusion, Millennials, Generation X and Baby Boomers all have concerns about securing their retirement future. It’s never too early to start and if you think it’s too late, just start now!
Sandra J. Quinn-Bailey, LACP, AU, AINS –
is CEO of Women Financial Power. Her firm is dedicated to encouraging Small Business and Individuals to follow the model of Executives in using Non-Qualified Plans for Tax Planning, Business Planning, Legacy Planning and Wealth Accumulation.