Category Archives: Retirement planning

Generation X: Factoring healthcare costs into retirement planning

pink-lesleyThis is the final blog in a three-part series exploring the economic history and future of Generation X. The series focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments and, in the second installment, we discussed savings, pensions, and Social Security. The last blog focuses on Generation X and healthcare.

Many of us Generation Xers are not factoring healthcare costs into our retirement planning, which is a mistake. As healthcare expenses continue to rise and as we age, having a plan in place makes sense.

The cost of healthcare in the United States is increasing every year. According to the most recent Milliman Medical Index, in 2015, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan was $24,671. Healthcare costs for this typical family have more than doubled over the past decade.

To combat rising healthcare costs, there is something Gen Xers can do now—start a health savings account (HSA). An HSA has several tax advantages. The money isn’t taxed on the way in and grows on a tax-deferred basis. Additionally, it can be withdrawn tax-free when used to pay for qualifying medical expenses both at present and in retirement.

What many people—including Gen Xers—don’t realize is that an HSA could be an investment option relating to medical costs in retirement. Medicare doesn’t cover all healthcare costs, like nursing home and assisted living expenses. HSAs could be useful when paying for medical bills and paying for long-term care. But Gen Xers should also consider whether it is better to save money for long-term care in an HSA or buy a long-term policy. Doing the due diligence on the options now can save money down the line.

According to Dawn Helwig, a principal at Milliman, it is smarter to buy a policy sooner rather than later. As she said in a 2014 Wall Street Journal article, “For each year applicants in their 50s delay buying coverage, carriers typically raise premiums by 3% to 4%, simply because they are a year older….” Helwig also noted that those who wait to buy this insurance may encounter higher premiums down the line because carriers are dealing with losses on existing policies. With those losses, they have raised premiums between 4% and 8%.

Another option that we Gen Xers can consider when we reach retirement age is rethinking Medicare plans. Medicare itself has four parts: hospital insurance (Part A), medical insurance (Part B), Medicare Advantage plans (Part C), and prescription drug coverage (Part D). At age 65, most people are automatically enrolled in Medicare. But Medicare doesn’t cover everything, and participants must pay copayments and deductibles.

Those who have Medicare Parts A and B can decide to receive all their healthcare services through a provider organization under Part C, also known as Medicare Advantage. Most Medicare Advantage programs have low monthly premiums, and they cover all of the services offered under original Medicare except hospice. To determine whether Medicare or Medicare Advantage is a better option financially, it is important to compare and contrast the costs associated with each one.

As one Gen Xer says, “My parents got to think about what they wanted to do at 65. I don’t have that option. We are running into something that our parents didn’t have to deal with.”

Clearly, Generation X hasn’t had it easy and faces numerous challenges on the way to retirement. But by doing some research and planning for the long term, we might just be okay.

Generation X: Savings, pensions, and Social Security

pink-lesleyThis is the second blog in a three-part series exploring the economic history and future of Generation X. The series also focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments.

Generation X faces major retirement challenges.

Besides the issues of job security and stagnant wages, there is the topic of cold hard cash—saving enough, having enough, allocating enough.

Some Gen Xers know that they started saving too late and wouldn’t be able to make up the difference. Others were worried because they’d been saving since they got their first jobs—20+ years ago—and felt that that money still wouldn’t be enough when they reach retirement age. And others just couldn’t save. As one fellow Gen Xer put it, “My wife and I don’t make enough together to save for retirement and the kids.” And let’s not fool ourselves—“retirement age” no longer has a firm definition.

We Gen Xers aren’t alone. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute, “Almost two-thirds of workers (64 percent) say they feel they are behind schedule when it comes to planning and saving for retirement.” This survey also notes that cost of living and day-to-day expenses top the list of reasons why workers don’t save (or don’t save enough) for retirement.

Pensions, often referred to as defined benefit (DB) plans, used to be a mainstay. But they are not as common as they once were, and this, too, is affecting Generation X. In fact, according to Jennifer Leigh Parker on CNBC.com, Generation X is the first generation to see its pension leg replaced by 401(k) savings plans, which were increasingly adopted during the 1980s. The 401(k) plans are portable but aren’t designed as a monthly “pension paycheck.” The owner of the account balance has to take significant action to understand and convert any or all of it to that pension paycheck. Gen Xers , in general, will find that its collective savings plan account balances are woefully deficient and for many, sitting in a tax-deferred account. And the Internal Revenue Service (IRS) can’t wait for us to start cashing them out.

Additionally, we Gen Xers, who have been paying Social Security payroll tax for years, may not receive full benefits upon reaching retirement age.

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Generation X and retirement: The background

pink-lesleyIn this three-part series, we explore Generation X’s economic history and discuss what this generation can do to prepare for retirement.

While the so-called “me me me generation” of Millennials has received most of the financial spotlight of late, this blog focuses on my demographic brothers and sisters, those of us from the Reality Bites and Pearl Jam era. We are Generation X, and we face major retirement challenges. Reality does, it seem, bite for us. But there is some hope.

There are about 46 million of us born between the mid-1960s to the late 1970s. It’s been noted here and here that Gen X was hit especially hard during the 2008-2009 financial market collapse. According to the Pew Charitable Trusts, Generation X lost almost half of its wealth during the economic downturn.

Forbes wrote in 2013 that “…a recent census report found that people between 35 and 44 saw a 59% decline in median household net worth between 2005 and 2010, the largest drop of all age groups.”

The repercussions from that recession will reverberate for years. As Ivory Johnson wrote in 2014 on CNBC.com, “Members of Generation X face the daunting task of planning for a retirement that will likely include no pension, a potential Social Security haircut, stagnant wages and high education costs for them and their children.”

We in Generation X continue to contend with stagnant wages and job insecurity.

According to a recent report from the Economic Policy Institute, real hourly wages fell or stagnated across the wage spectrum between 2013 and 2014 even for those with a bachelor’s or advanced degree. The report says, “Comparing 2014 with 2007 (which was the last period of reasonable labor market health before the Great Recession), hourly wages for the vast majority of Americans have been flat or falling.”

Besides stagnant wages, we are also facing unique issues in the workplace, which come from being wedged between the two largest generations in history. With Gen Yers nipping at our heels and Baby Boomers blocking the path to advancement, Gen X is in an uncomfortable position. In a 2010 Washington Post piece, Joe Frontiera and Dan Leidl wrote, “As both groups [Baby Boomer and Millennials] jockey for position, Gen Xers are left to alternately fend off overeager newbies and patiently wait to earn a rare opening at the top.” Frontiera and Leidl also note that many Gen Xers have been in the same position for a long time and are “butting up against the Gray Ceiling, a stagnating phenomenon…”.

And those Baby Boomers (born between 1946 and 1964) don’t appear to be going anywhere. Gallup notes that Baby Boomers are staying in the workforce longer: “As the largest generation born in U.S. history, Baby Boomers’ sheer numbers coupled with their reluctance to retire will likely ensure that their influence endures in the workplace in the coming years. The generation still constitutes about one-third (31%) of the workforce…”.

In this blog series, we take a look at the financial challenges that Generation X has been dealing with recently and how this generation can plan for the future. We also talked to several fortysomethings about their retirement concerns and what can be done to address them (quotes are sourced from conversations in 2015).

Milliman clients recognized by “Save 10” initiative

Milliman announced this week that a group of its clients will be recognized by the Financial Services Roundtable’s “Save 10” initiative, which is a business-to-business, peer-to-peer effort encouraging responsible employers to help their employees better prepare for retirement by helping them to save 10% of their income.

“One of the best ways to help people save for their financial future is for companies to automatically enroll employees in workplace savings programs,” said former Minnesota Governor Tim Pawlenty, chief executive officer (CEO) of the Financial Services Roundtable. “Save 10 recognizes such companies, and we hope that by highlighting their terrific efforts, more companies will become Save 10 employers.”

The Milliman clients joining the Save 10 effort include Mankato Clinic, Francis Investment Counsel, Fish & Richardson, Tiller Corporation, Southern Minnesota Beet Sugar Cooperative, CliftonLarsonAllen, Felhaber Larson, and Communications Systems, Inc.

“We work with our clients to provide a meaningful retirement benefit,” said Milliman principal Kevin Skow. “Features like auto-enrollment and auto-escalation allow employers to better help their employees save for retirement. Our plan participant tools help to educate employees on how much they need to save and how they can accomplish their retirement goals.”

Nearly 82% of employees save for retirement when their employers offer an auto-save program compared with just 64% when employers do not. Save 10 aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify them as Save 10 certified. This includes offering a retirement plan, providing employees opportunities to save 10% of their income, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

Other companies that have joined the Save 10 effort include Allstate, Assurant, AXA, EZE Castle Integration, First Horizon, Franklin Resources, IBM, LPL Financial, Mastercard, Nationwide, Northern Trust, Popular Community Bank, Principal, Prudential, Putnam Investments, Quicken Loans, State Farm, SunTrust, TransAmerica, Toyota Financial Services, United Technologies, and UNUM.

Read more about the Save 10 initiative and qualifying criteria at www.Save10.org. For more on Milliman’s retirement planning tools, click here.

Baby Boomers and Millennials: Two generations prepare for retirement

Murray-SarahMuch has been said and written about the differences between generations. Indeed, two separate studies recently highlighted retirement planning trends among two different cohorts. Baby Boomers were the subject of a December 2014 report issued by the nonprofit Transamerica Center for Retirement Studies (TCRS), “Baby Boomers Are Revolutionizing Retirement: Are They and Their Employers Ready?” and a younger generation got the spotlight in the Principal Financial Group’s 2015 Millennial Research Study.

The people of the Baby Boom generation have been trailblazers in many ways and it seems their retirement plans are no different. According to the TCRS report, Baby Boomers are changing the traditional idea of what the golden years should look like, out of necessity if for no other reason. A somewhat grim statistic from the report is that 41% of Baby Boomers expect their standard of living to decrease when they retire. With longer life expectancies, the rising cost of healthcare, and a lack of adequate savings, it’s no surprise that many people in this generation expect to work beyond the traditional retirement age of 65. Some expect to never stop working completely. Many call working in retirement the “fourth leg” of the traditional “three-legged” stool.

TCRS’s research found that there is a strong desire among Baby Boomers for phased retirement options, but in reality less than half of employers have practices in place—such as the ability to move to a part-time position while drawing retirement benefits—that allow employees to transition into retirement slowly. TCRS’s report discusses ways Baby Boomers can positively change their retirement outlook, such as keeping job skills up to date and seeking advice from a financial advisor. In addition, the report mentions ways employers can help employees transition into retirement, such as providing phased retirement options and educating employees on Social Security and Medicare.

What about the Millennials? While the Principal Financial Group’s report summarized results regarding all aspects of Millennials’ finances, the research included trends in retirement savings. Here are some encouraging statistics in Principal’s report:

• 82% of Millennials feel it is important to save for retirement
• 63% of them started saving for retirement at or before age 25
• 59% of them plan to maximize the amount of pretax contributions allowed in their accounts

Principal’s study also indicates that most Millennials believe they should be contributing more of their pretax pay to their employer-sponsored retirement plans than they currently are, but at least a majority of them have made the crucial step to start saving, no matter how small the contribution.

One notable difference in the generations is technology preferences and usage. Millennials are used to communication through employer websites, email, texting, and even social media sites such as Facebook. While these concepts certainly aren’t foreign to older generations, Millennials are more likely to expect their employers to communicate with them electronically rather than through traditional methods such as regular mail.

Another difference between the two groups is whether or not they expect to be able to rely on Social Security. While many Baby Boomers have already started receiving Social Security, the Principal report states that only 22% of Millennials include Social Security in their retirement planning, presumably because the system’s purported problems have been well covered in the media.

But let’s not pretend that different generations have nothing in common. It’s safe to say that the majority of American workers, regardless of age, know that retirement planning is important, but find it intimidating at times and can benefit from employer assistance. While Principal’s study states that 60% of Millennials expect to be better off financially than their parents, younger people may still find themselves in need of options such as phased retirement and can reap the benefits of an older generation paving the way for change.

As is always the case, the optimal retirement scenario occurs when both the employee and employer contribute to the success of the employee’s retirement goals. Employers can benefit from creating a workplace that supports workers of all ages. Recognizing the differences between generations, developing retirement planning resources that help employees at every stage of their lives, having a broad employee communication and education approach, and supporting phased retirement options can help achieve this goal.

Plan sponsors: How to keep employees on track for retirement readiness

Guanella-JayPeople get excited about technology. There are hundreds of websites chronicling the next big thing in technology, presenting information about how a device will save you time and money while providing entertainment. Getting people excited about or even acknowledging a retirement plan is much more complex. Over the years, there have been several new features created to help participants by increasing the flexibility of how they fund their retirements. Participant inertia is a large problem and directly relates to the usage of these new features.

As retirement plan professionals we believe having a solid retirement strategy is a no-brainer. For us, it’s a partnership with the plan sponsor that leads to great results by getting them involved and sharing responsibility of communicating and educating the participants. Human resource professionals have direct contact with employees and a great understanding of the best communication mediums and incentives that drive employees to take action.

There are several tools available for participants to project their retirement income. One of them, PlanAhead for Retirement®, enables participants to input additional income sources and variables to project their replacement incomes. Through the PlanAhead for Retirement tool, there is also a retirement readiness report that provides clients a view of the expected retirement outcomes of their participants on a plan level. The retirement readiness report displays where participants fall in relation to their projected replacement income at retirement. The report allows the client to change several variables such as the target of replacement income, return on investment, and changes to employer contributions. This is further broken out by age, service, and participant contribution rate. This interactive report helps the client make the leap from using current data such as participation rate and average deferral rate to projecting the results in the future.

PlanAhead_exhibit_1

At a plan sponsor level, using industry-related statistics on participation rate and average contribution rates we can show plan sponsors how they compare to their peers. Any deficiencies in the peer comparison are consulting opportunities. Using their participant demographic data, scenarios can be created to determine how changes to plan design (i.e., adding or increasing employer match) or targeting communication to specific participants encouraging them to take advantage of the benefit provided will improve results.

At an employee level, the medium of communication and the timing of the call to action are also paramount. Coordinating the retirement plan education and enrollment at the same time as other benefit enrollment periods has advantages as the employee is already completing paperwork. Showing an employee general information on plan demographics can also lead to an increase in participation and contribution rates via competition. Inertia is present in all retirement plans. What better way to promote change than to make it a competition, albeit an internal one.

Getting a plan sponsor to act on a retirement plan is just as important as getting the employees to act. As retirement plan professionals, we know that developing a partnership with sponsors can help lead to great results, keeping employees on track and taking steps to more successful retirements—using that flashy new technology that makes it easier for everyone.

Milliman awarded “Save 10″ recognition for helping workers save for future

With more than half of Americans not saving enough for retirement, the Financial Services Roundtable (FSR), Washington’s leading financial trade association, is recognizing Milliman with a “Save 10” award for its tremendous efforts to help their employees prepare for a secure retirement by enabling them to save 10% of their income.

G-Erickson_Milliman-Save-10-Award
Milliman’s Gerald Erickson receives Save 10 Award from FSR CEO Tim Pawlenty on behalf of the firm.

The newly launched “Save 10” campaign is a business-to-business, peer-to-peer effort to encourage responsible employers to help their employees save for a secure financial future by initiating programs to encourage employees to put aside 10% or more of their income each year.

Milliman’s plan includes a 50% matching contribution on a 6% auto-enrollment provision and a generous profit-sharing contribution. The profit-sharing contribution, which has historically been 10% of compensation annually, paired with the matching contribution, provides for high average account balances among participants in the Milliman plan.

“One of the best ways to increase retirement savings in America is through employers and Milliman is leading the way,” said FSR chief executive officer (CEO) and former Minnesota Governor Tim Pawlenty. “Save 10 will be an easy way for workers to think about saving. There are many companies like Milliman helping to put their employees on the right path to savings and Save 10 will recognize those employers in an effort to encourage others in the marketplace to follow suit.”

One of the cornerstones of Save 10 is to encourage “auto-save” programs. Auto-save includes programs such as auto-enrollment in a retirement plan upon being hired and auto-escalating employee savings contributions as incomes rise. Nearly 82% of employees save for retirement when their employers offer an auto-save program—compared with just 64% when employers do not. The Save 10 campaign aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify the company as certified for Save 10. These activities include offering a retirement plan, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

UK retirement planning model is more than a drop in the bucket

Pension reform in the United Kingdom has given individuals more access to their retirement money. As a result, post-retirement risk has also been shifted to the individual. This development is providing financial service professionals the opportunity to create new retirement planning models.

In this FT Adviser article, co-authors Colette Dunn and Chris Lewis offer perspective on a retirement framework that matches a retiree’s income needs to specific levels of risk. Here is an excerpt:

Using a bucket approach to discuss expected spending requirements throughout retirement can make it easier for individuals to understand their needs, their varying attitudes toward risk, and the necessary trade-offs. This approach can also be used by advisers to build a bespoke portfolio solution for a client…

The bucketing approach can be thought of as a ‘bottom up’ approach to determining the retirement solution, which is intuitive and easy to explain to clients. In addition, sophisticated modelling tools are available which an adviser can use to validate and/or fine-tune the overall asset allocation within and between buckets – that is, taking a ‘top down’ or diversified portfolio level approach.

Benefits of the framework
The framework can be used by advisers as part of the retirement planning process, and can be tailored to individual circumstances, taking into account both financial and emotional needs. It meets the three previously identified benefits, namely:

• Simplifying a complex retirement into a structured approach,

• Ensuring that an appropriate level of risk is taken for each prioritised retirement need, and that the overall level of risk for the portfolio is appropriate for the individual, and

• By segmenting into buckets, and thereby providing a higher level of certainty in the short to medium term, it provides individuals with peace of mind and helps to avoid the potential for overreaction to market shocks.

Google+ Hangout: What is InvestMap™?

Milliman’s retirement glide path technology, InvestMap™, enables plan sponsors to deploy an age- and risk-based asset allocation strategy for the core funds held within a defined contribution (DC) plan. By creating a custom target date glide path overlay, plan sponsors and participants are able to personalize their investment approaches while taking advantage of automated account management features.

In this Google+ Hangout, Jinnie Olson discusses InvestMap with Brittney Hagenbart.

To learn more about InvestMap read Jinnie’s blog “What is InvestMap?

Milliman infographic: The boomerang generation’s retirement planning

The Millennial generation has gotten a bad rap concerning their retirement planning habits—or lack thereof. Fortunately, there are several steps Millennials can take to secure a better retirement. The infographic below features 12 tips Millennials should consider when developing their retirement strategies. The tips are taken from Jinnie Olson’s article Retirement planning: 12 practical tips for Millennials. The infographic also highlights some of the generation’s retirement planning behaviors.

Millennials boomerang infographic_Milliman Inc_09-29-14