According to a survey by The Hartford, the younger the worker, the greater the attraction to having the ability to take at least a portion of a retirement account as guaranteed income. A high percentage of workers in all age ranges found this appealing, but the greatest appeal was among workers under the age of 30, with 95 percent of these workers responding affirmatively to the survey.
I have two reactions to this. First, I’m pleasantly surprised that these young workers are focused on the end of the retirement savings journey. I am the father of an under 30 worker, and I can tell you that my daughter is more financially astute than I was at her age. On the other hand, I was a bit taken aback. Maybe I’m reading more into this than I should, but this result indicates a high level of risk aversion among these younger workers, which concerns me a bit.
I’ve written about my concerns with annuities in 401(k) plans previously, but that is not my focus here.
Rather, I’m concerned that younger workers are too risk averse. On the one hand, it would be hard to blame anyone whose initial investing experience includes the 2008-09 market decline. For those just a few years older, their initial investing experience might also include the market decline of 2000-02. Living through one or both of these periods as an investor was scary.
Perhaps these younger workers saw their parents’ accounts take a significant hit during these periods as well.
However, I still contend that younger workers have the greatest retirement savings gift of all: time.
Various studies have shown that the biggest determinant of the amount of retirement accumulation is the amount saved. So the first tip that I would give to younger workers is to defer as much as possible into their retirement from day one. Even if this is a nominal amount, try to increase the percentage you are deferring each year. If there is an employer match, try to defer at least the maximum amount to get the full match as soon as you can afford to do so.
Beyond that, younger workers can afford to take more risk with their investments, and I generally suggest they do so. Those of you who read my posts here know that I am not a cheerleader for target-date funds. I do, however, feel that they can be an excellent starting point for younger workers in that the allocations of the longer-dated funds (2050 and up) are generally pretty aggressive. Beyond that, if you are under 30, your allocation should be on the aggressive side, as you have plenty of time to weather the inevitable market ups and downs.
Guaranteed income products in 401(k) and other retirement plans will likely be the wave of the future. If done correctly and a good product is selected by the plan sponsor, this can be a plus for many participants. But at the end of the day, the amount of guaranteed income that will be available to a participant will depend upon the amount that he or she has accumulated. As such, the focus of workers needs to be on saving enough and investing wisely.
More and more employers are offering advice options in various forms. Take a look at these options if they are available. At some point during your career, it might make sense to hire a professional financial adviser help you evaluate where your are vs. where you need to be at retirement.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.