As Americans across generations grapple with the daunting task of securing their financial futures, a new report from the Transamerica Center for Retirement Studies (TCRS) and Transamerica Institute sheds light on the widespread challenges faced by workers from Generation Z to baby boomers. Titled "An Uncertain Future: Retirement Prospects of 4 Generations," the study draws from the TCRS 25th Annual Retirement Survey, encompassing insights from over 5,400 working Americans. It reveals a complex landscape where economic pressures, caregiving responsibilities, and job security concerns converge, leaving many worried about their readiness for retirement.
Generation Z, the youngest cohort entering the workforce, is already feeling the strain. Nearly 60% report burnout, often juggling multiple jobs or side hustles. Despite this, a commendable 76% are saving for retirement, typically starting at age 20, and contributing about 15% of their annual pay when enrolled in workplace plans. Yet, vulnerability remains: the median emergency savings for Gen Z workers stands at a modest $2,000, and over a quarter have dipped into retirement funds prematurely. Catherine Collinson, CEO and president of the Transamerica Institute and TCRS, emphasizes the importance of this generation’s efforts, stating, "Generation Z is already saving for retirement and they have many decades to work, save, and grow their savings. They need to continue investing in their human capital through lifelong learning, keeping their job skills up to date, and safeguarding their physical and mental health."
Millennials, now in their late twenties to mid-forties, find themselves in the thick of the "sandwich generation" pressures, balancing work with childcare and elder care. The majority report being impacted by debt and financial setbacks related to the pandemic. While 85% are saving for retirement, their median household savings hover around $65,000, and nearly a quarter have made early withdrawals from retirement accounts, highlighting financial strain.
Generation X workers, many approaching traditional retirement age, express significant apprehension about their financial readiness. Only 18% feel strongly confident about retiring comfortably. Half anticipate relying primarily on self-funded savings, including 401(k)s, 403(b)s, and IRAs, while a striking 77% worry about Social Security’s future. Alarmingly, just one-quarter have a written financial strategy. Collinson reflects on this generation’s unique challenges, noting, "For Generation X, the road to a financially secure retirement has been circuitous. Among Generation Xers who were fortunate enough to be offered a 401(k) plan in the early years of their career, many were unaware of the importance of saving."
Baby boomers still in the workforce often expect to work beyond age 70 or never retire at all. Although 85% report saving for retirement, their median household balance of $270,000 falls short of many benchmarks for retirement readiness. A mere 27% have formal retirement strategies, and fewer than 40% have contingency plans for unexpected job loss or health issues. This paints a picture of a generation striving to catch up amid uncertain circumstances.
Beyond generational challenges, financial experts urge workers nearing retirement to rigorously evaluate their plans during the critical three- to five-year window before leaving the workforce. Tony Ogorek, president and founder of Ogorek Wealth Management, advises, "It's a wonderful time to do a real look-in-the-mirror assessment of your financial situation. This may be an opportunity to bail yourself out and get yourself rightsized before your paycheck stops." This period serves as a dress rehearsal for living off savings and can reveal hidden vulnerabilities.
Common warning signs include carrying excessive debt, such as mortgages, credit cards, or car loans, which can force retirees to withdraw larger sums from their savings prematurely. Ogorek warns, "What that tells you is you've likely been living beyond your means." Another pitfall is upsizing one's home close to retirement, which can reduce financial flexibility. "Instead of downsizing as they near retirement, they've actually upsized," Ogorek explains, adding that this can limit the ability to extract equity or reduce debt.
Many retirees also face the challenge of financially supporting adult children, whether through helping with home down payments, graduate school tuition, or subsidizing rent. While noble, Ogorek cautions that such support should not come at the expense of solidifying one's own retirement plan.
Investment strategies also demand careful consideration. Some pre-retirees, aiming to catch up, adopt aggressive portfolios or concentrate their investments, exposing themselves to market volatility and the dreaded "sequence of returns risk." Ogorek notes the danger of market downturns early in retirement, which can deplete savings prematurely. Rob Leiphart, vice president of financial planning at RB Capital Management, advises, "Ignore the short-term performance and instead focus on the long-term and trajectory of your retirement plan."
Maximizing contributions to retirement accounts is another critical step. Ogorek points out that workers nearing retirement who aren’t maxing out their 401(k) or IRA contributions should examine their cash flow and savings habits. Ideally, individuals should aim to save 15% of their income, including employer matches.
Tax efficiency in retirement portfolios can greatly affect retirees’ net income. Leiphart explains that traditional 401(k)s and IRAs tax withdrawals at ordinary income rates, meaning a retiree in the 22% tax bracket needing $50,000 annually must withdraw about $61,000 to cover taxes. In contrast, withdrawals from Roth IRAs or Roth 401(k)s are tax-free, preserving more assets for growth. Leiphart recommends converting some traditional savings into Roth accounts to achieve tax diversification.
Retirement readiness can also be compromised by sacrificing savings to pay for children’s college tuition. While helping with education is admirable, Ogorek warns, "You can't borrow to pay for retirement." Those nearing retirement should carefully weigh such decisions.
Job security remains a pressing concern as economic slowdowns can trigger layoffs, especially for older workers. Ogorek suggests assessing job stability and adjusting spending accordingly to build a buffer against unexpected job loss.
Credit health is another indicator of financial well-being. A low FICO score three to five years before retirement signals potential trouble, as lenders scrutinize creditworthiness, and poor scores may reflect underlying financial stress.
Healthcare costs often surprise retirees. Chronic conditions, expensive medications, and higher Medicare premiums can strain budgets. Ogorek stresses the importance of anticipating these expenses: "People often underestimate how much health care is going to cost."
In the realm of retirement planning, knowledge gaps remain widespread. Jim Sexton, a certified financial planner in Hudson, Ohio, who leads financial education classes, observes, "Very few people understand what they need to know to help them prepare financially for the future." This ignorance can leave many unprepared for the realities of retirement.
Adding to the complexity, motivational speaker and author Tony Robbins highlights common misconceptions about Social Security and 401(k) plans. He emphasizes that Social Security was never designed to fully cover all living costs during retirement and underscores the importance of contributing regularly to tax-advantaged accounts, especially when employer matches are available.
Robbins draws attention to the hidden fees in employer-sponsored 401(k) plans, which were not required to be disclosed for three decades. Even with new disclosure rules, many providers bury costs in complex documents, leaving participants unaware of the financial drain. "What the majority of Americans don’t realize is that an increase in 1% in fees will cost you 10 years in retirement income," Robbins warns.
He illustrates this with a hypothetical scenario involving three employees investing $100,000 at age 35 in mutual funds yielding 8% annually but subject to different fees: 1%, 2%, and 3%. By age 65, the employee paying the lowest fees nearly doubles the retirement savings of the one paying the highest. Moreover, assuming each needs $60,000 annually in retirement, the highest-fee payer exhausts their savings before age 75, while the lowest-fee payer’s nest egg lasts until 95.
Robbins, frustrated by these hidden costs, partnered with America’s Best 401(k) to reduce fees. His own research company saved $5 million in retirement costs without additional expense, highlighting the importance of scrutinizing plan fees.
As workers across generations navigate a challenging retirement landscape, the common thread is clear: proactive, informed planning, regular savings, prudent investment choices, and awareness of hidden costs are essential to securing a stable and fulfilling retirement. The journey may be complex, but with the right knowledge and strategies, Americans can better prepare for the years ahead.
