Saving for retirement is harder than solving climate change?

Young adults are more optimistic about making a difference on global issues than improving their own financial futures, according to a recent surveyOpens in a new window from the TIAA Institute and the AgingWell Hub at Georgetown University’s McDonough School of Business.¹

The TIAA/Georgetown survey of 1,009 full-time employed adults between the ages of 24 and 35 found that more than half of young adults (56%) feel they can make a difference on global issues like social injustice and climate change. They are less optimistic, however, about their finances, with less than half (41%) expecting to do as well financially as their parents.

Their financial insecurity is rooted in their experiences—the Great Recession of 2008, soaring home prices, student debt, skyrocketing interest rates and inflation. Still, some of the pessimism could also be tied to life stage. It can be difficult, observed Evan Potash, a TIAA Executive Wealth Management Advisor, for young people to think 30 to 40 years out. “I believe, with good financial planning, a young person can save for retirement, reach shorter-term goals and invest with a longer-term social and environmental impact,” Potash said. “Nonetheless, educating young people is critical to their success.”

Potash added that for many of today’s young adults, retirement goals need to be married to societal ones. “One major difference between younger generations and their parents is their social awareness regarding investments,” he said. Indeed, according to Nuveen’s 2022 Investor Survey, 96% of Gen Y and Gen Z investors own or have owned mutual funds guided by responsible investing principles—nearly twice the share of their baby boomer and Gen X counterparts.²

Poor financial literacy makes saving harder

The good news is that 64% of young adults are still saving money, either regularly or intermittently. Young adults consider saving for retirement their third most important financial goal—behind only building rainy-day funds and saving for major purchases such as a house—and most of them participate in some kind of retirement savings plan.

Problem is, it’s unclear whether they’re getting the most out of those plans. For example, nearly two-thirds don’t know for certain if their retirement plans provide a vehicle for minimum guaranteed income, or a retirement annuity.According to the TIAA/Georgetown study, this “begs the question of whether they fully understand their retirementplan features.”

TIAA Institute head Surya Kolluri calls this the study’s “aha” moment. “Employers and advisors need to clarify how a retirement plan works and what they can expect, and the role a real lifetime income product can play in that portfolio,” said Kolluri.

Another finding: When it comes to saving, there’s significant variation across race and gender. White young adults are struggling most with saving, for instance. Twenty-four percent of white respondents report that they are “not saving right now and are just trying to make ends meet,” versus 16% of African Americans and 17% for Hispanic or Latino young adults. Young women, meanwhile, are more likely than young men to say they are not saving right now because they are focused on paying down debt (17% versus 10%).

Gender affects how young adults get financial information

The TIAA/Georgetown study also explored disparities between how young men and women seek financial information and advice. Women rely more on family members for advice than do male counterparts—41% vs. 30%. Men are more likely than women to get informationfrom apps (37% versus 25%), articles (28% versus 18%) and social media (26% v. 17%).

What can friends and family do to help the young adults in their lives get on track with retirement savings? TIAA Wealth Management Advisor Melissa Shaw has three tips:

• Ask whether their employers offer retirement plans and whether the employers will match employees’ contributions. These questions, said Shaw, “open the door to broader discussions,” such as why not taking full advantage of their employer’s match is the equivalent of throwing away free money.
• Teach them the power of compound interest. “If you contribute $5,000 per year into your retirement account starting at age 25, your account balance at age 65 will be double what you’d have if you waited till age 35,” said Shaw. “It’s the difference between $500,000 and $1 million, approximately.”
• Remind them they don’t need to be an investing whiz to open a retirement account. Many workplace plans have default investment options such as target date funds and asset allocation funds that cater to novice investors. Said Shaw, “They can choose one of the simple options, start saving now, and start the compounding effect early."