Think of retirement as a family dinner table. It's an heirloom that is meant to weather the years, and a central fixture in the lives of each relative.
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On the whole, grandparents, or Baby Boomers, had it pretty good. The table's four legs were sturdy: a job, a home, Social Security , and a pension.
But Generation X essentially experienced a house fire.
They were the first to see their pension leg replaced by 401(k) plans, which were widely adopted in the 1980s.
Meant as an alternative to pensions paid by employers, 401(k)s are funds based on worker contributions that put the investment risk, and control, in employees hands. Many lost this leg in the Great Recession as US equities lost about 45 percent of their value by the low in March 2009.
The housing bubble took another leg from Gen Xers' table. Home prices have fallen 34 percent since their peak in July of 2006, according the Case-Schiller home price index, and nearly eight million Americans have faced foreclosure since.
"We used to talk about the three legs of retirement, including social security, pensions, and a 401k. Pensions guaranteed defined benefits. But much more weight and pressure applies to the 401k and personal savings now," says Suzanna de Baca, vice president of wealth strategies for Ameriprise.
Indeed. In 2006, then-President George Bush passed the Pension Protection Act, which allowed companies to automatically enroll employees into 401(k) plans. By 2012, 401(k) assets outnumbered traditional pension assets, according to State Street financial advisors.
Enter Generation Y. Roughly between 18 and 34 years old, this generation's table is wobbling on its last two legs: a job and a 401(k), which are co-dependent. Thus instead of protection, Gen Yers have inherited a great deal of pressure.
More than ever, they know they better be employable, and they better be skilled 401(k) investors. The trouble is, it is quite difficult to do this when faced with high unemployment, and ever-higher student loan debt.
“My chances of succeeding are based on what I can do. It's every man for himself, unless somebody passes it down to you,” says Roxanna Rabbie, a 23-year-old sales rep for an IT consulting firm. With a 401(k) and three individual retirement accounts (IRAs), she says, “It’s important to be able to plan from a very young age.”
Clearly, saving for retirement is largely a factor of consistent work — currently a more elusive achievement for Gen Yers than the other generations, according to the Bureau of Labor Statistics.
Gen Yers began entering the work force in the early 2000s, when the national unemployment rate was at a low of 4.0 percent. Since then they’ve watched it rise, peaking in 2009 at 10.2 percent. At the moment, the unemployment rate among Gen Yers stands at 9 percent, according to the Bureau of Labor Statistics. That's 0.8 percent higher than the national average of 8.2 percent.
“My biggest concern is job security, because as expensive as health care and education can be, trying to find a job right now is even harder, even when you have a good resume,” says Jamie Righetti, 28, a Columbia University graduate.
Not surprisingly job security is Gen Y’s first and foremost financial concern, according to a new study by Ameriprise Financial.
“They’re seeing classmates in college not getting jobs. Unemployment has really hit home with Gen Y,” said Ameriprise's de Baca.
Without a job, retirement savings stops. Righetti has a 401(k) plan from a previous employer, but while job-hunting, says “I can't afford to invest anything in it.”
You're hired! Start saving?
Say you have nabbed that elusive steady job. Now the savings process can begin. But the amount you can start saving often depends on the costs incurred to become employable; and education costs are higher than ever.
The average annual cost of attending a year of college varies from $19,300 at a public college to $37,400 at a private one, according to the U.S. Department of Education’s latest data. This is respectively $4,200 and $6,200 more expensive than it was in 2000.
These costs are driving student loan debt, which is currently clocking over $989 billion, according to the research firm FinAid.org, and is a major threat to Gen Y's retirement savings.
“Our research shows over a third of Gen Y entered the work force with more college debt than their parents. They see student loan debt as their biggest barrier to 401(k) participation,” says Richard Mason, president of corporate markets for ING U.S. Retirement.
For many graduates, reducing debt is the first priority before saving. At 29, software developer Bryan Valenti is contributing to his 401(k) savings plan only after having paid off his student debt, and plans to do more. “I need to open an IRA this year to improve the rate of saving,” he said.
An IRA's appeal is that it is tax deductible; unlike a 401(k), it is unregulated by an employer, who can limit contribution amounts.
But apart from the tangible hurdles of student debt and unemployment, Gen Yers attitudes about their financial picture say a great deal about their retirement expectations. Perceptions about housing and Social Security in particular distinguish Gen Y.
Unlike their parents, they don’t view housing as a viable nest egg.
“Boomers said, ‘Oh I’ll retire on my home equity.' Gen Y can see that wasn’t the magic bullet it appeared to be,” says de Baca.
Since the recession, Gen Yers have watched as roughly half of Americans homeowners struggle with "underwater" mortages — owing more than their homes are worth.
“You don't buy a house because it is a good nest egg. You buy it because you want a stable home, a place to start a family. It's an expense,” says Valenti.
Nor are Valenti and his peers counting on Social Security. “I think the climate of shrinking state government budgets and accumulating federal debt will torpedo Social Security. I'm not doom and gloom every day, but I'd be pretty stupid to depend on it."
According to the Congressional Budget Office's annual report on Social Security solvency, in 2023 trust fund assets will start to diminish until they become exhausted in 2036 — well before Gen Yers even contemplate retiring.
“I hope that social security will exist when I retire, but I don’t believe it will,” says Prem Ramaswami, a 30-year-old Internet product manager.
Better be a Buffett
Without home equity or government checks to support retirement, the golden years become dependent on investing.
So Gen Yers are doing their homework.
“My clients out of grad school are a different breed. They do much more research before they invest,” says Wayne Copelin, founder of Copelin Financial Advisors.
“They do not count on Social Security and don’t even know about pensions, but most of them are maxing out 401(k)s,” he adds.
Dave Roderick, 30, works as a software engineer at an aerospace company, and is an active investor with a stock portfolio, a Roth IRA and a conventional 401(k).
“I buy stocks with the long-term view in mind. I think I have more options in terms of the types of funds I can invest in with my 401(k). My dad probably didn’t have 50 funds he could choose from when he was my age,” says Roderick.
But Roderick's equity-focused investing style may not be the norm. “We see Gen Y as actually overly conservative, they’re so afraid of risk. It’s almost a backlash Depression-era mentality. An under-amount of risk is a lost opportunity for growth. As markets improve, this may change, but it will take them longer to take more risk,” says de Baca.
Roxanna Rabbie echoes the post financial crisis mentality: “Don’t ever gamble what you can’t afford to lose. If you’re not a pro trader, it’s safer to go into a CD [certificate of deposit] or some kind of municipal bond," she says.
Suffice it to say, there isn’t a safety net built for Gen Y retirement, and exposure to market risk is inherent in all investment funds — including 401(k)s and IRAs.
On top of market risk, the financial hurdles of student loans, a weak housing market, and high unemployment are shaping this generation’s savings rate, and there is no end-date guarantee. Only time will tell whether 401(k)s will provide what is necessary — but time is Gen Y’s greatest ally.
© 2012 CNBC.com