As a member of Generation Y, I was taught the principles of saving and investing by my father, a member of the Baby Boomer generation. My father sat me down before I was even eligible to participate in a 401(k) plan and illustrated the power of an investment that compounds over time, especially the growth opportunity an investment can experience when someone in his or her youth invests over a lengthy period of time, say forty to fifty years prior to one’s retirement. Unfortunately, too many younger employees, namely those within generation Y, whom were born between 1980 and 1988, don’t receive this education. The result: Their failure to save for retirement in the most effective way possible.
Generation Y’s participation in company sponsored 401(k) programs is dismal; a 2006 report by Hewitt and Associates found that a scant 31% of Generation Y employees were participating in their company’s retirement plan. In contrast, some 61% of Generation X (born 1964-1979) and 72% of Baby Boomers (born 1946-1963) are participating in their company-sponsored 401(k) programs. The problem with today’s youth doesn’t end with 401(k) use or knowledge; it was reported that only 19% of Generation Y’ers plan to fund a traditional or Roth IRA, with the majority of young workers citing their lack of understanding these retirement tools as the primary reason for not doing so.
There is a positive spin on the situation, since workers become more aware of investing and saving for retirement as they get older, which is exemplified by the fact that approximately 40% of Generation X’ers have a tax-advantaged IRA and their 401(k) participation is higher than their younger counterparts. Sadly, the fact that today’s young workers are throwing away the potential to earn additional money that is tax-deferred as a result of more years until retirement than older workers points the need for increased financial literacy and education.
From my experience as an HR professional conducting employee new hire orientations, I have found that over half of our new hires within Generation Y didn’t even know what a 401(k) was or how it could help them to save for retirement. Amazingly, as I showed them the power of money’s growth over time in a presentation, their minds lit up and everything “clicked” with them. For this reason and those mentioned prior, I strongly advocate for financial education in the classroom.
If our youth were required to attend a course in financial literacy, I believe that more young workers would participate in 401(k) plans and more young people would utilize IRA’s as a result of their increased understanding of the different retirement tools available to them. This education should start in elementary school and continue through one’s high school years. Additionally, every college and university should have a financial literacy course required as a core class for all of their students. For younger workers now and into the future, saving for retirement will become increasingly important.
As Social Security and Medicare become increasingly taxed, they may provide little or no support for Generation Y and future generations. There are many great programs already out there that educate our youth about financial literacy, including one such program known as Junior Achievement; however, programs like this need to be mandatory in every classroom to have the greatest impact on every child, everywhere.