Earlier this week, The Wall Street Journal ran an article about a recent retirement planning trend: Young people in droves are saving money in their 401(k) plans.
Last year, 44 percent of employees under age 25 participated in their plans, up from 27 percent in 2003. And more than 6 out of 10 of workers between ages 25 and 34 are contributing to their plans, a 5 percentage point increase from 2003. These stats come from Vanguard, which provides plans for millions of 401(k) plan participants.
Automatic enrollment partially explains this phenomenon, but not entirely. A Fidelity spokesperson noted that while 3 percent is typically the auto enrollment savings rate, the actual average savings rate is 6 percent among 21- to 33-year-old participants in its plans. So these young people are deliberately upping their savings rate.
What's behind this trend? In a word, fear. Young people are scared into saving, having witnessed the derailment of their own parents' retirement plans, thanks to the recent economic train wreck. In some cases, their parents lost their jobs, their homes were in foreclosure, they were forced to dip into their retirement plans, their financial lives unraveled. It was a wakeup call for many young adult children, who were moved to take action so that one day they might have more options.
Even though family tragedy may have been the motivating factor, it's great that young people are diligently saving for retirement. They are in the best position to accumulate wealth because they have time on their side.
Why we need to save more
The Center for Retirement Research at Boston College recently released a paper titled "4 reasons why retirement risk is growing." The paper analyzes the ratio of wealth to income from 1983 to 2010 based on data from the Survey of Consumer Finances. The triennial survey from the Federal Reserve Board is a goldmine of data that shows how Americans are faring with respect to their personal finances.
Alicia Munnell, director of the Center for Retirement Research who wrote the paper, discovered that the wealth-to-income ratio was consistent from 1983 to 2007, but "the ratio in 2010, in the wake of the financial crisis and ensuing recession, was way below that for all the other survey years."
Still, the ratio in earlier years was nothing to celebrate. "The amazingly stable pattern of wealth to income over the period 1983 to 2007 should not be a source of comfort for four reasons -- people are living longer; 401(k) plans have replaced defined benefit plans; health care costs have increased; and real interest rates have declined," she writes.
In other words, all these trends work against baby boomers who are facing retirement with perhaps as much wealth as their parents, minus the pension. And it's not enough to get them through 20, 30 or 40 years of retirement.
So, young people, seeing firsthand the effects of inadequate retirement savings on their parents, are compelled to take action. Good for them!