Spend, or save? How to build a financial future

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While everyone who works is most likely looking forward to retirement, fewer people are prepared for it.

Younger generations are saddled with mounting student loan debt, and appear to be focused on starting a family and buying a house, which puts retirement on the backburner.

Older workers are staying in the workforce longer. For some, it’s a necessity because they have not saved enough, but for others, it’s their preference.

Then there is the rising cost of living coupled with stagnant wages making it harder to save for retirement.

Divorce, has an impact, too. So does being a single-parent, or caring for aging parents. Both situations can eat away at retirement savings.

Complicating things further is the greater incentive from credit card offers and low interest rates to borrow and spend rather than save for the future.

“Some people make a lot of money and live an elaborate lifestyle and haven’t saved very well,” said Edward O’Gorman, chief investment officer and senior wealth adviser for River Wealth Advisors in Harrisburg and Allentown. “Thoughtful retirement plan design is a good thing for everyone. Deferring consumption can be hard when you are in an environment that’s largely consumer-driven.”

Conspicuous consumption in a culture that highly values spending over saving influences people’s financial habits, including their view on retirement saving.

“The culture we live in teaches us from a young age that bigger is better and more is better,” said Lisa Strohm, president and CEO of Good Life Advisors of the Lehigh Valley. “It becomes challenging for many to live at or below their means.”

Rising prices also direct people’s attention away from focusing on retirement savings.

“You have the inflationary escalation of prices in health care, education, all those things are grabbing at people’s personal income and how much is left?” said Tom Williams, partner and senior wealth adviser at Domani Wealth in Wyomissing. “There’s many more inducements to spending, borrowing is easier.”

The SECURE Act

Nevertheless, there are ways employers can help employees save more and encourage the creation of a sound, healthy retirement plan.

Recent legislation could also help encourage people to save for retirement. On Dec. 20, Congress passed the Setting Everyone Up for Retirement Enhancement Act, known as the SECURE Act, which became law on Jan. 1. The law make changes designed to help people save for retirement.

“One of the stipulations of the SECURE Act was there will be a requirement that the participants receive a lifetime income disclosure,” said Mike Dinan, senior wealth adviser for Domani Wealth. “This disclosure would estimate a lifetime monthly income figure a participant could receive if they were to use their total account balance to generate that figure.”

By illustrating those monthly payments over their own and potentially their spouse’s lifetime, people might be more inclined to save more if they see that it’s a lower amount than they expected, Williams said.

“One reason it was incorporated into law was to get people to save more,” Williams said. “I think it was to educate people on what it really amounts to.”

The SECURE Act was designed to ease the looming retirement savings crisis, Strohm said. Among other provisions, it provides for a new tax credit for small employer plans adopting automatic enrollment.

Employers can also make it easier for employees by automating deductions from their paycheck into their retirement savings account. Companies can also automatically enroll employees in retirement savings plans at the start of employment.

“If you don’t actually see it in your paycheck, it’s a lot easier to do,” Williams said. “A lot of the major investment houses can directly link to your checking account. Anything like that that makes it more automatic is very helpful.”

Some employers put in a direct match for employees who put money into retirement accounts, and others automatically increase the percentage, tying it into employee raises.

To make it easier to save, companies can automatically enroll employees in their retirement plan at a default savings rate, Strohm said. According to a Vanguard study, participation rates are 30 percentage points higher in 401k plans with automatic enrollment.

“But most plans’ default savings rates are low, at about 3% or 4%, which is likely to be insufficient for most employees,” Strohm said.

What employers are doing

To deal with this low savings rate, some retirement plans automatically increase the amount their employees save over time, typically by 1% each year. This annual increase can continue until the employee reaches a target savings amount, such as 10% of pay.

“Of course, offering a company match greatly increases the attractiveness of participating in the company retirement plan, as the match  may be viewed as ‘free money’ to the employee,” she said.

“I would say most employers have a fiduciary mindset,” Williams said. “Most employers want to do what they can to help employees save for retirement.”

Many young people have more demands on their income and many younger people are focused on possibly receiving an inheritance to enhance their retirement, Williams added.

“We have seen exceptions where young people are putting a fair amount into their 401ks,” Williams said. “It may be just a question of ability to save as opposed to desire.”

Naturally, the earlier one starts, the more time one has to build a nest egg, Williams said.

Those older workers who are relying on Social Security may face a reduction in those benefits once they retire, he added. For many, retiring means phasing down, but not out. It could mean doing something different, working part-time. Sometimes it’s because they need to work for money, he said.

“I think the definition of retirement has changed to some extent,” Williams said. “It may head in that direction even more when people look to retire and realized they haven’t saved enough.”

Some consider putting extra money into a health savings account as a retirement boost, but Dinan said it’s not a good idea because employees have to go through their deductible first.

“You saved some money because it’s pre-taxed dollars but you can’t really amass a big balance down the road,” he said. “You really need to maximize those HSA deposits to gain a benefit there.”

Savers on the rise

When taking the long view, fewer people are prepared for retirement but more people are saving, River Wealth’s O’Gorman said.

“With the gradual decline in defined benefit plans …I think people are saving more to the extent that their personal situation will allow it,” he said.

According to a variety of sources, about 40% of Americans have no retirement savings. Economic and societal factors contribute to that, such as higher education costs. Young people in particular are carrying a heavy debt load, O’Gorman said.

“Interest rates on student debt are fairly high so if you are entering the workforce saddled with that debt it makes it harder to save,” O’Gorman said.

With millennials in particular, it forms attitudes about money that are probably lifelong and they may be more risk adverse, he said. They may recognize the importance of saving, but know it’s a hard thing to accomplish.

However, O’Gorman’s firm also sees the retirement-bound parents of millennials hitting the reset button realizing they may have to work longer.

Retirement plans

In terms of attracting employees in a tight labor market, the retirement plan can be an important tool, according to O’Gorman. By providing a good match, employers can offer the best way for employees to save for retirement, he said.

“I think even for someone like myself, I don’t expect Social Security to look the same when I get there. Maybe I have to wait longer,” said O’Gorman, who is about 15 to 20 years away. “The dependence on that safety net is very real.”

O’Gorman tells clients to plan by determining what they want their lifestyle to look like five, 10 or 15 years down the road.

Strohm said her clients tend to be good savers so it’s difficult to say from her personal experience whether fewer people are saving for retirement. “But, it’s well-documented that people in general are not saving enough for retirement,” she said. “According to the Employee Benefits Research Institute, only 22% of Americans are confident that they will have enough resources for a comfortable retirement.”

The statistics are even worse for women. According to a Transamerica study, only 10% of women are very confident about their long-term financial situation.

While the younger generation gets a bad rap when it comes to money, it’s been well-documented that millennials have started saving for retirement at an earlier average age than that of Gen Xers and boomers, she said. In addition, millennials tend to save a larger percentage of their income than previous generations.

Women often face unique obstacles, such as lower pay, less time in the workforce due to raising children or caring for other family members, and outliving their money, she said.

“Because women tend to live longer than men, they are at a greater likelihood of suffering chronic illnesses resulting in greater medical costs that may thwart retirement savings,” Strohm said. “Women outliving their husbands can also mean loss of spousal pension benefits and lower Social Security benefits.”

Unprepared for retirement

Americans feel underprepared for the financial realities of retirement, according to 2018 data from Northwestern Mutual. Nearly eight in 10 (78%) Americans are “extremely” or “somewhat” concerned about affording a comfortable retirement while two thirds believe there is some likelihood of outliving retirement savings.

These fears are substantiated by further data highlighting dramatic savings shortfalls and ebbing confidence in social safety nets.

• One in five Americans (21%) have NO retirement savings at all
• One in three Baby Boomers (33%), the generation closest to retirement age, only have between $0-$25,000 in retirement savings
• Three quarters of Americans believe it is “not at all likely” (24%) or only “somewhat likely” (51%) that Social Security will be available when they retire
• Nearly half (46%) of adults have taken no steps to prepare for the likelihood that they could outlive their savings

This is the initial set of findings from the 2018 Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors toward money, financial decision-making, and the broader landscape issues affecting long-term financial security.

Source: Northwestern Mutual