While the industry prepares for the number of ways the baby boomers will change retirement planning, another challenge is looming just behind themtheir children. This generation possibly won't be able to retire at all.
"That's why this generation is saying 80 is the new 65," says Karen Wimbish, director of retail retirement for Wells Fargo. "Retirement at 65 may not, in fact, be possible. Either you're going to have to spend less in retirement or you're going to have to work longer at some job or part time. Total retirement may not be an option."
The reason is that millennials between the ages of 22 and 32 face a raft of challenges their parents didn't face: increased longevity, declining pensions and student loans that have heaped mountains of debt on their young shoulders. Only half of millennials reported that they had started to set aside money for retirement, according to a recent Wells Fargo Retirement survey. More ominously, of those who had not started, 87% reported that it was because they didn't have enough money to save.
"This may be the first generation in history that does not end up in a better place than their parents," Wimbish says. "It's a great call to action for our industry around financial literacy for the younger generation."
Heeding the Call
Some advisors are finding ways to heed that call and grapple with the biggest obstacles to getting this generation to startapathy about saving for a goal so far away and paralyzing levels of debt. The Wells Fargo study found debt was "overwhelming" for 42% of respondents, which was twice the rate of boomers who were also surveyed. Large student loans, which had a total outstanding balance of over $1 trillion at the end of 2012, cut into savings. Making matters worse, this crop of young people haven't exactly had the best role models when it comes to saving, advisors say.
"The generation a little older than them has not done the most stellar job saving money either," says Wells Fargo advisor and retirement planning specialist Linda O'Connor. "So as a country we're setting ourselves up for big problems if people don't accept responsibility."
Advisors who recognize the looming crisis have begun working to get millennials to understand that if they don't start saving now, they're wasting the most crucial retirement-saving years they'll ever get. The hard part, of course, is getting them into the office in the first place, and so far, advisors admit they haven't done a great job of outreach. Some advisors say it's because the retirement of the baby boomers presents a more immediate concern.
Roadblocks to Progress
Raymond James advisor Michael McCormick, of the McCormick Retirement Group, says that about 90% of his office's resources are focused on the boomers and about 10% on millennials. Although that ratio is shifting very gradually, he believes it represents the challenge that the industry faces in working with this group.
"From the advisor standpoint, are we doing a good job of getting to those people? I would say we're not," he says. "Hopefully we can do more with that, but it's hard to find the time."
The most efficient way for reaching out is to go through the family of an existing client and connect with their children or beneficiaries, he says. In his office, in which two of four staffers are millennials, McCormick encourages children to come in with their parents at least once a year.
Unfortunately, another reason some firms aren't doing active outreach to this generation is because they generally do not have the money for a financial consultant, McCormick says. That doesn't mean it's a good idea to ignore them. O'Connor, for instance, has incorporated planning for her clients' millennial children into her own practice. She offers the service as a courtesy, recognizing the importance of having a savings plan in place early.
Eventually, this generation will have a level of assets that makes them attractive to advisors, but it will probably be much later in their lives than it was for previous generationswhich will make planning for their impending retirement much more difficult for advisors. Plus, the opportunity for advisors to tap into this market is clearly already there despite its lack of assets today. A majority of millennials, 59%, reported in the Wells Fargo study that they would be interested in working with an advisor, and 57% of those said they would prefer to work with a seasoned advisor with years of experience, as opposed to someone their own age.
As such, savvy firms are undertaking some broad-based marketing measures to try and reach out. Hilliard Lyons, for example, sends a monthly email to the millennial contacts that the firm has collected from existing clients or outside sources over the years, says Darryl Metzger, director of the firm's private client group. The newsletter includes instructions on prioritizing debt, setting up a 401(k) and eventually planning for life insurance for millennials who are married or have children.
Planning, Gen W-Style
Once they're in the office, the first order of business is imparting the importance of doing some long-term thinking. O'Connor says the eureka moment usually comes when she is able to model out how much money clients will save over time simply by skipping a few lattes and bringing their lunch to work a few times a week.
"A fun thing to do with them is show them the magic," she explains. "You save $100 a month, your company matches. You do this for 30 years, you have over $450,000. You show somebody a number like $450,000 and it makes the light go on."
McCormick has a helpful tool on his website called the "Cost of Waiting" retirement income calculator. It lets any visitor see how much he or she is saving and determine if it is enough for retirement.
Once millennials are ready to start saving and planning for the future, advisors should start out with a plan that has three key elements: it must be simple, accessible and as automatic as possible. Wells Fargo targets millennials with its online trading platform Wells Trade, which has lower minimums and can direct clients to call centers for additional information. These platforms can offer millennials some of the basic tools and resources they need to get started, Wimbish says. In addition, it has been helpful for retirement plan sponsors and companies to adopt features such as auto-enroll and auto-increase functions for 401(k) offerings, which McCormick refers to as "God's own dollar-cost averaging."
From the advisor's perspective, new investing strategies will be required for Generation W(on't). Rather than focusing on protecting principal, advisors will have to help millennial clients continue to accumulate assets through retirement. They will have to use the portfolio more creatively to provide a reliable form of income. In addition to relying on a traditional line-up of dividend stocks, Wells Fargo is focusing on annuities and building ways to model the annuity in the portfolio.
Product manufacturers are also combining funds and ETFs to help generate conservative, but more guaranteed gains later in life, according to Frank McAleer, head of managed and income solutions at Janney Montgomery Scott.
No matter how well they plan, the late start means that many mass-affluent millennial retirees will likely have to spend from their principal. Either that, or they'll find themselves working significantly farther into retirement, Wimbish predicts.
Previous generations were able to rely on other resources such as pension plans and Social Security, but it is unclear how much income millennials will be able to draw from those once-guaranteed sources, Wimbish says. "Everything is an unknown [for millennials]," she explains. "They say, 'I don't know how long I'm going to live. I don't know what the market will do. I don't know what healthcare will cost. I don't know if I can keep working.'"
Basically, all the traditional planning variables are up in the air. So the sooner advisors can reach out and begin the conversation, the better off millennials, and the advisors who will serve them, will be.