A Gen Y investing trend could portend a sea change for retirement investing and planning.
Younger investors are choosing Roth IRAs over traditional IRAs in startling numbers, according to recent data. Investors under 34 years old have a surprising eight times as much money in Roth IRAs as in traditional IRAs, according to
That's even more dramatic than the shift shown in an
The trend reflects in part the reality of younger workers' lower paychecks (and lower tax brackets) but also widespread interest in saving, based on distrust of the financial industry, and greater awareness of the Roth IRA strategy. The chart on the following page shows the clear trend: The younger the investor, the greater the ratio of Roth assets to traditional IRA assets, according to the
"The overall point is that Roth is the appropriate choice for more people," says
For most millennials, Ritter says, forgoing the tax deductions now to receive tax-free money in retirement is an easy decision. Generally, he points out, these younger investors are in a lower tax bracket now than they will be when it comes time to tap into the funds from the IRA.
"I would expect this trend to continue as more people become aware of it," Ritter says.
PARENTS & BLOGS
The growing preference for Roths stems from a few factors, say advisors: tax benefits specific to workers at the beginning of their careers, the generation's savings-oriented mentality, and a broader cultural awareness of Roths among friends and family. Young investors seem to be getting information about Roths from parents, financial blogs and social media, says
In many cases, he adds, the first question a millennial will ask in a client meeting is about Roth IRAs. "Advisors are definitely pushing Roths on younger folks, but that demographic is so information heavy, they come in with at least some decent knowledge," Moss says. "If a millennial is seeking out a financial advisor, they have done some semblance of homework."
Yet other advisors point out that younger clients' knowledge tends to stop at the creation of the accounts. "There is a real lack of knowledge in what you can invest in," says
Welch says he's "a little impressed" by the roughly half of millennial clients who come in with knowledge of the retirement planning strategy. But few seem to know what to do with the account once they set it up, he notes, with many simply too conservative when it comes to putting money into their Roth IRAs.
"There is a fear of being too aggressive long term," Welch says. "They have grown up during the financial crisis and they have become hesitant to invest."In fact, he says, many of his younger clients assume that they can only invest their Roth IRA funds in CDs: "It's a huge misunderstanding."
It's possible that the new focus on Roths is actually boosting younger workers' overall retirement preparedness.
Total retirement assets for investors age 15-35 were more than
Many younger clients feel that, "No one will take care of me but me, and I should save money," Moss says. "They're not doing it because they're savvy, but because they're scared."
Yet some advisors worry that those retirement assets aren't as secure as one might imagine. "Someone will come along and realize there is a lot of money out there and come up with a clever idea to market to the mind-set of millennials," says
One concern is that a budget-strapped federal government could renege on the Roth's promise and impose more taxes or restrictions on withdrawals later on – something Moss dismisses as unlikely. "I would have to think there would be some grandfather clause," he says.
There's also the worry that millennials may, despite the best of intentions, wind up sabotaging their own savings efforts. Because investors can make Roth withdrawals without penalties for first-time home purchases or for educational purposes, Peterson explains, Gen Y investors may find themselves tempted to drain the accounts well before retirement.
"It's a human temptation and a likely temptation," he says. "I would urge them to resist unless it is an absolute last resort."
|Copyright:||(c) 2008 Source Media Inc. All Rights Reserved.|
|Source:||Source Media, Inc.|