Research shows that the millennial generation is the best generation of savers since the Great Depression. This is good news. Millennials understand how important it is to save, and they want to save. But it doesn’t mean that millennials are saving in the right way or are saving enough, especially for retirement. In fact, the average millennial’s savings is lacking.
This lack of savings has created an accumulation gap—the difference between wanting to save and saving enough—among millennials. Millennials are saving, but they might not be taking advantage of the best retirement savings vehicles (IRAs, employer-sponsored retirement plans, etc.). And they might not be getting what they need from their savings organizations.
It’s time financial organizations shift their attention from baby boomers, who are in the midst of retiring, to millennials, who are active members of the workforce preparing for retirement. By doing so, financial organizations can revitalize the landscape of saving and in turn, reap the rewards of new long-term customer relationships.
Low-Interest Rates Reshaped Saving
According to industry expert and Ascensus Regional Vice President Kevin Boyles, the accumulation gap can be attributed in part to the perceived breakdown of traditional accumulation models, such as time deposits or cash accounts, because of near-zero interest rates. Low rates of return over the last several years have profoundly changed the landscape of saving—for retirement or otherwise—and this has affected the millennial population the most.
As young savers, prior generations started saving money in cash accounts or time deposits and actually received a measurable rate of return from their credit union. And their credit union likely focused its products and marketing efforts on this accumulation phase. Once the prior generations entered their prime earning years and their accounts reached a substantial level, many invested larger amounts in stocks and equities for greater growth potential. Much of this was driven by their participation in employer-sponsored retirement plans, such as 401(k) plans. Later, as they got older, many returned to fixed rate and insured products, like CDs and annuities with credit unions, and insurance companies, to preserve their savings.
Most millennials, however, have not followed that process, in large part because of falling interest rates. So instead of beginning with cash accounts or time deposits to build a savings foundation, most millennial savers have been compelled to kick off their savings career with investment-type savings vehicles and face the risks that come with them. While some argue that employer-sponsored retirement plans have taken the place of needing those passbook savings and CDs, studies such as the 2016 Wells Fargo Millennial Study show that a large number of millennial workers are without access to a company retirement plan. The result is a considerable shortage of millennial savers, and potentially a wide retirement savings accumulation gap for these millennials.
While millennials seem to have embraced employer-sponsored retirement plans as their preferred retirement savings vehicle, they are contributing to IRAs at a significantly lower rate than previous generations. This may be an opportunity for financial organizations to encourage maximum saving habits by investing in an IRA in addition to a retirement plan. Promoting IRAs and their benefits will not only help eligible millennials save smarter, but will give financial organizations another way to connect with millennial customers.
Paying Off Debt Is Priority
The accumulation gap can also be attributed to the dilemma millennials face between wanting to save and paying off a large amount of debt, especially student loan debt. The 2016 Wells Fargo Millennial Study shows that approximately one-third of millennials have college debt. In addition, millennials who incur major expenses, such as those related to home purchases or job changes and relocation, tend to dip into their savings for these costs, rather than incur more debt. Thus, they save for retirement in smaller increments.
It is crucial that millennials get the most from saving what they can with a retirement savings vehicle that best fits them. This is where financial organizations can begin to bridge the accumulation gap and create new opportunities for growth. The simple act of educating millennial customers about the benefits of saving early, even conservative amounts, and leaving the money alone can make a difference. After all, small savings started early can go a long way. Small amounts saved early on in life can result in larger accumulations than waiting and saving larger amounts late in life, depending of course on investment return. Incorporating tax-advantaged retirement savings accounts into this education strategy will go even further.
Time to Reevaluate
Each financial services provider has a role to play in helping bridge the accumulation gap. It may require taking a hard look at existing savings products from the millennials’ perspective. This may mean no longer viewing savers and savings products the same way. It may mean reexamining products, such as the Roth IRA, reevaluating how staff is trained to promote and discuss those products, and gaining a better understanding of how to align an organization’s values with that of the average millennial. After all, a financial organization’s future success in the savings market will depend heavily on millennial consumers.