• by Jack Loechner , Staff Writer @mp_research, January 6, 2011

A new analysis by Aon Hewitt reveals that Generation Y workers (those ages 18 to 30) may be most at risk from trending stagnant wages, job insecurity and a steady decline in pension plan and retiree medical benefits despite having the most amount of time to save. Due to lack of participation in defined contribution plans, low savings rates, and high rates of cashouts, 80% of Generation Y workers will not meet all of their financial needs in retirement unless they significantly improve their saving and investing behaviors.

After factoring in inflation and postretirement medical costs, Aon Hewitt projects Generation Y workers will need to save 18.7 times their final pay in retirement resources to maintain their current standard of living in retirement (assuming retiring at age 65; more will be needed to retire earlier).

The research shows, though, that employees of this generation who work a full career are on track to accumulate just 12.4 times their final pay, leaving a shortfall of 6.3 times pay, a third of their total needs. Workers without a pension plan will have a shortfall of 8.0 times pay. This also assumes no future leakage from withdrawals or cashouts, and that Social Security benefits are not reduced, rendering these scenarios optimistic at best.

The many reasons for these shortfalls include rising health care costs, increased life expectancy and the emergence of defined contribution plans as the primary retirement savings vehicle for most Americans. But one factor in particular plays a significant role for this Generation, says the report: employees' saving and investing habits.

The study shows that only half of Generation Y workers who are eligible to participate in a defined contribution plan do so, meaning they have accumulated very little savings, if anything, in their plan. Among those who do save, the average before-tax contribution rate is only 5.3% of pay, with 41% of workers not saving enough to receive the entire employer-provided match.

Even if workers begin saving early, the research shows that most cash out their savings well before retirement. Nearly 60% of Generation Y workers cash out their retirement savings when changing jobs, missing out on the opportunity for decades-worth of tax-deferred growth on their investments. A 25 year-old employee who cashes out $5,000 from his or her retirement plan may potentially be sacrificing $56,000 at retirement in exchange for perhaps only $3,500 after taxes and penalties from the cashout. (This assumes a 7% return through age 65, and 25% tax rate at retirement.)

Employee Defined Contribution Saving and Investing Behaviors
	Generation Y (Age 18-30)	Generation X (Age 31-45)	Younger Boomers (Age 46-54)
Retirement resources needed	18.7 times pay	16.1 times pay	14.6 times pay
Participation rate	50.3%	71.4%	76.4%
Contribution rate	5.3%	6.8%	8.4%
Median plan balance of full career participants	$4,780	$25,690	$108,060
Equity allocation	75.1%	71.9%	64.6%
Use of premixed portfolios	68.7%	53.7%	45.2%
Cashout rates	58.7%	45.8%	36.9%
Source: AON Hewitt, December 2010

Pamela Hess, director of Retirement Research at Aon Hewitt, concludes that "Younger workers will have fewer future benefits from their employers and potentially the government... they need to save a third more in their... contribution plans than workers nearing retirement today... but there's clearly a lack of urgency to proactively save... Automated tools with more robust defaults, innovative matches, investment advice and personalized messaging leveraging innovative technology are effective ways to start and keep these younger workers on the right path..."

For additional details from AON, please visit here