- Sorry, everyone, one second,
I'm canceling the brunch plans I made
when I had a full social battery.
I know I wasn't gonna go,
I just wanted to let them down easy.
All right, where were we?
Oh, okay, yeah.
Welcome back to "Bright Ideas."
A date with you I will never cancel.
And you know what else is a date you can't cancel?
Retirement. It's coming for you.
And that's why we have an entire episode all about it.
Stay tuned.
(upbeat music)
Okay, so yeah, the last couple of years
have made us all unsure whether the plans we make
for the future, near or far, are actually gonna happen.
But there will come a day when it will be time to retire,
whether we've planned and saved for it or not.
And here to share some strategies
is Fidelity's Sarah O'Toole.
Sarah has one tool in particular
that I myself didn't even know about,
and it delights the part of my brain
that loves order and resists choosing from a ton of options.
Sarah, welcome to "Bright Ideas."
- Hi, Rod, thanks so much for having me.
I'm happy to be here, and even happier to learn.
Your brain is excited by a conversation
about retirement planning.
- Well, it does feel empowering even if it is also far off.
It's that feeling of,
"Oh, I have plenty of time to think about that."
Is that something you often hear from Millennials
and Gen Z that we love to have that extra time?
- Absolutely, retirement is decades in the future for most.
And so when you think about all of the things that change
as you move through life, it's important to consider them.
So saving for retirement may compete
with paying off student loans, buying a home,
starting a family, and so we advocate
for about a 15% savings goal in the working years.
But know that that can be aspirational for many people.
But it's important to start early,
save what you can, because the earlier you start,
the more time you have for your investments to grow.
- That's amazing, and even once I accept
that I need to be allocating
or putting away 15% of my salary to retirement,
I say the acceptance, like it's a a stage of grief
or something like that.
Another thing I remember from my corporate days
is thinking of a retirement plan
as having to make elections.
Just like in health insurance.
Just that term can make you think
about a lot of other choices,
which in turn makes me think of choice anxiety
which I definitely suffer from in a big way.
- It's definitely a real thing, I can relate,
and investors have a lot of choices.
So anything we can do to minimize complexity
when saving for retirement is great.
And one option is a target date fund.
And today, what we see is about 70% of millennials
are allocating all of their 401k balance
to a target date fund.
- [Rod] Awesome, so is that kind of like a
save the date invitation?
- In a way, yes.
So a target date fund is a mix of investments,
think stocks, bonds, and cash.
That changes over time to become more conservative,
as you move from the early parts of your working career
through retirement.
And the term target date refers to the year
closest to the one that you plan to retire.
It's very easy to find because the year
will be in the name of the fund.
So for example, if you plan to retire in the year 2050,
you choose the 2050 fund.
- So it's just enough math
that you feel like you're doing something,
but at the same time you sort of have already figured it out
which is really easy and great.
So I want to go back to something you mentioned earlier
about the investment mix becoming more conservative
the closer you get to that target retirement year.
Why is that important?
- Well, it really comes down to navigating different risks
that can surface during your life.
So market pullbacks, inflation, deflation,
are just a few examples of the risks to our savings.
And that's why you want a portfolio
with an asset allocation that can help manage those risks.
And there's complexity in this.
It's not easy and not everyone has the time,
the interest, or the desire
to manage their investments themselves.
So a target date fund is set up
to do some of that hard work for you.
Asset allocation, rebalancing, all of that is happening
as you're going about your daily life.
And fueling that at Fidelity is a whole group
of experienced investment professionals
who are passionate about investing
in these types of portfolios.
- Okay, that sounds interesting.
So tell me how it actually works.
- Well, a target date fund operates
on something we call a glide path,
which is a term for how the asset allocation
shifts over time.
If you start early, in those early years
of your investment in the fund,
you might see something like a 90% allocation to stocks.
As you move through your working career,
and by the time you actually retire,
that allocation may have shifted
to something more conservative with a 50% allocation
to stocks and the remainder of the portfolio
in more conservative asset classes such as bonds and cash.
And if you wanna fast forward to later in your retirement,
we might see the percentage of stocks dip down
towards something around 20% of the portfolio.
- Well, I'll have to admit,
I don't feel like a glider in life,
but I do like the concept of gliding.
Definitely more than I love the concept of rebalancing
or ebbs and flows.
And I admit I do feel little outside my lane
when I see anything that asks me to make choices
about things like asset classes.
- I totally get that,
and that's why I think something that does the work for you
is so valuable, especially because research has shown
that asset allocation explains
the majority of the variability in portfolio returns.
- So that sounds like it would make a big difference
in your retirement funds.
So obviously every generation thinks they're total unique,
and maybe they are,
but something I think differentiates Millennials
from previous generations can be the way we approach work
and even the longevity of it,
and loyalty to our employers to be frank.
And that can have retirement planning implications.
So it leads me to my next question.
I'm curious, do you have to go through an employer
for a target date fund?
- You don't.
So target date funds are accessible
both inside and outside of a retirement plan.
And you can easily invest in one right now,
speaking for fidelity at least, and you could check out
the URL on your screen to get more informed
about the target date strategies and how to invest.
And again, every generation is going to have unique needs
and preferences, but as we talked about at the outset,
saving early and holding a diversified portfolio
are positive steps in planning for the future.
- That's a big relief and it makes me much more likely
to commit to a plan and not cancel it last minute
which I do with my friends so often.
Sarah, I just wanna say thank you so much for joining us.
- It's my pleasure, Rod, thank you.
- Now I wanna dig in a little more
around what makes us tick as Millennials and Gen Z,
in ways that are shaping our retirement savings behaviors.
And a perfect person to join me
in that conversation is Angi Chen.
Angi's an economist with the Center for Retirement Research
at Boston College.
Angi, hello.
- Hi, Rod.
- So I know that one area of your research
has been how prepared for retirement are Millennials
compared to other age groups?
And I'm admittedly procrastinating,
asking you about your findings because I'm a little nervous.
So I'll first ask, why is it important
to study this in the first place?
- Well, first, don't be nervous.
The findings do show a positive trending.
But to answer your question,
Millennials are a very interesting demographic group
because they are the most diverse and very educated group.
With all that education comes with more student debt,
and that naturally affects retirement savings.
Additionally, we're all living longer,
so we'll need more money to finance that longer lifespan.
And social security typically only replaces
about 30 to 40% of our pre-retirement earnings.
So all of those factors combined
create a very interesting research agenda.
- So can you tell me a little bit more
about your findings specifically?
- So if you had asked me back in 2016,
I would've had to break some bad news to you,
that Millennials are a little behind
on a lot of key life milestones,
include being retirement savings
relative to Baby Boomers or Gen Xers at the same age.
But we redid our study back in in 2019,
and we started to see the tide turn a little bit
with older millennials, particularly catching up
on a lot of these indicators, including retirement savings,
buying a house, earnings, et cetera.
So we're seeing the trend shift.
- Yeah, so I'm used to thinking of trends
as something I can see in real time.
And that trend will replaced by a new one next week.
We see '90s fashion coming back right now, for example.
But the trends you track take years to play out.
What are some other ones you've had your eye on?
- Well, just to dig a little deeper
into the student debt aspect.
One area that researchers like me are keeping an eye on
is the return on investment on student debt.
So if you took out some loans
to finance a engineering or computer science degree,
that return on investment is gonna look really different
than if you took out the loan
and didn't actually get your degree.
- Student loans are always
a good icebreaker at parties, I'm finding, is that right?
- But don't let it hold you back
from starting to save for retirement.
Another trend that we're keeping an eye on
is whether employers are offering these retirement plans
to their workers at work.
We do find that unless the employer
is offering those types of plans,
many workers don't save for retirement.
But at any given time, only about half of workers
have access to these plans through their employer.
But that being said, even if your employer
doesn't offer a plan, you are able to go
and open one of these individual
retirement accounts yourself.
- So my takeaways are that Millennials are super special
and they do the most, and that for a lot
of demographic reasons, it's even more important
that we be methodical about retirement savings.
- Yes, if there's one takeaway,
it's to start saving for retirement early and consistently,
even if you can only set aside a small amount now.
- Angi, thank you so much
for the extra savings motivation and context.
And to the viewers, thank you for joining us on this journey
that has been "Bright Ideas."
I've had so much fun.
All episodes are now live, so check them out,
get caught up, get confident about investing,
and check out fidelity.com
to make your new ideas about investing
even brighter and more actionable.
And remember what we've said all along,
invest in what you know.
And my hope is we've expanded the frame
of what you know about investing.
Thanks for watching.
(gentle music)