Wells Fargo Offers Distinct Approaches for Millennials, Gen Xers, Baby Boomers Who Are Preparing for Retirement

Guidance aimed at maximizing savings, controlling costs, confronting fears as U.S. workers are living longer and will need to fund at least a 15-20-year retirement

Originally Published by Wells Fargo.

Aspiring retirees confront many of the same challenges, including how to make their savings last throughout retirement. But they can fine-tune their planning based on the distinct characteristics of the life stage they’re in, according to “Reimagining Retirement: Generational Strategies for 21st Century Challenges,” a new report from Wells Fargo Investment Institute (WFII).

Workers should plan to save at least 15 to 20 years of retirement expenses because they are living longer, healthier lives. But, “How can I fully fund retirement?” is a question that plagues even the best planners, as 40% of U.S. workers indicate they will either need to work longer or lower their costs of living to help meet their expenses1. “Costs, such as out-of-pocket spending on health care, are rising at a faster clip than retirement income,” said Tracie McMillion, head of global asset allocation strategy for WFII and an author of the report. “It’s daunting for retirees to keep up with expenses related to getting older.”

Women face acute challenges because they earn less than men and outlive them by about four years1. They also spend more of their monthly income on expenses than men (63% versus 58%) and have less saved. On average, women have $37,000, earmarked for retirement, while men have more than double that amount, $100,0001.

Millennials have the benefit of time to save and overcome their fears

Regardless of life stage, there are distinct actions to consider when approaching retirement. Millennials – born between 1981 and 1997 – have ample time to save. And they started saving early – 10 years before baby boomers – which means that “compounding could significantly impact their savings,” said Veronica Willis, investment strategy analyst for WFII and a report author. “But, millennials will also have less assistance than previous generations,” because employers have increasingly done away with pension plans.

Millennials, who still are early in their careers, should take advantage of automatic 401(k) enrollment and employer matching benefits. They should also try to preserve their retirement savings when shifting jobs and not cash out. To help combat fears of investing in riskier assets, a by-product of experiencing a deep U.S. recession early in their lives, the report outlines that millennials should “keep holdings diversified among growth assets – such as global equities and real estate, and more conservative assets, such as fixed income.”

Generation Xers are less confident as they balance family obligations

Many Gen Xers support children and aging parents at the same time. Therefore the group – born between 1965 and 1980 – may have shortchanged their own savings. Gen Xers should evaluate the need for life insurance or disability insurance, particularly if they have younger children. As circumstances change, Gen Xers should regularly rebalance to target their allocations. “Holding enough cash – roughly six to 18 months of living expenses – is important to your asset allocation mix,” McMillion said.

Gen Xers have had access to 401(k)s for most of their working years. And, after the age 50, they can explore “catch-up contributions” to help increase savings. “Remember, you can secure loans to pay for an education but not to fund retirement,” McMillion said.

Baby boomers ease into retirement on their own terms

63% of baby boomers are worried they will run out of money during retirement. To supplement the shortfall, some are turning to part-time or full-time jobs or starting their own businesses. Other ways they can manage expenses include moving to a state with a lower income tax rate or cost of living, reducing tax obligations, and shifting health-care costs to an employer.

“Baby boomers may want to maintain a higher allocation to equities during retirement, depending on their risk tolerance,” McMillion said. This group – born between 1946 and 1964 – also should devise a plan for when they tap into Social Security, whose benefits increase 8% per year for those who delay their full retirement until age 70, the report states.

Why retirees should consider a total return approach

Regardless of life stage, retirees may not be able to rely solely on income generated from a portfolio to fund their living expenses, and the report cautions against “chasing yield,” that is investing in riskier assets just because they have higher yields. Investors should instead ensure their portfolios reflect a total-return approach by “funding costs with both the potential price appreciation (growth) of assets and the interest or dividends received (income) from those assets,” the report concludes.

1 – 2018 Wells Fargo Retirement Study, October 15, 2018

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