According to experts, there are three main risk factors to consider when planning your future financial security: inflation, longevity, and market risk. With all three on the rise, younger generations are starting their retirement savings at a disadvantage.
To help young people find solutions and build their retirement confidence, Yahoo Finance’s Rachelle Akuffo sits down with some of the leading experts in the field of financial security and retirement planning: Bob Powell, Editor of the The Street’s Retirement Daily, Teresa Ghilarducci, Labor Economist and Retirement Security Expert, and Surya Kolluri, Head of TIAA Institute.
The panel provides answers to the important topics necessary to plan for your golden years, including preparing the next generations for retirement, along with social security, and caregiving. They also share their insights on how we as Americans need to reimagine our financial future and the steps needed to be better prepared for what lies ahead.
For the latest information on how to set yourself up for financial success, tune into Yahoo Finance Monday through Friday at 9 a.m. ET.
So, Surya, I want to start with you. This new report from TIAA that says that 42% of people, living paycheck to paycheck. 51% say they don't expect to do as well financially as their parents. Only 33% could handle an unexpected major expense. What is going to define retirement for Millennials?
SURYA KOLLURI: One of the things that [? jumped ?] out [? at ?] us during the study, was what the young adults are confident about. They are confident about taking on big societal problems, climate change, social justice. And they're not confident about taking on personal financial challenges.
If you think about agency, role modeling, ability to join a cause, all that exists on the social justice and climate change opportunities that they're involved in and gain confidence, whereas, on the personal financial side, lack of role models, lack of providing guidance and coaching. If we can increase the role modeling, and the coaching, and the confidence building on the young adults side, perhaps, their confidence will improve there, as well.
RACHELLE AKUFFO: When you look at the 25-year-old, who's trying to plan for retirement, so beyond the traditional make sure you max out your 401(k), invest in your Roth IRA, what advice do you have for them?
BOB POWELL: So it is hard for a 20-something to think about themselves as a 65 or 67-year-old, and then to think about 35 years into retirement. I think rules of thumb would be helpful here, and to say a number of financial institutions have said maybe you should target to have 2 times your salary saved by age 30, and 4 times by age 40, and 5 times and 7 times by age 67.
And they're not perfect these rules of thumb. But they're, at least, sort of things that you can benchmark yourself against. The other is-- Surya, has mentioned this a couple of times now. I think people really need to start thinking about the risks that they'll face in retirement in ways that they have never thought about before and the tools and products that you'll use to manage these risks or mitigate these risks.
RACHELLE AKUFFO: Now that can be overwhelming, though. So then-- so then what can people do? There is that disconnect between how well people think they are prepared versus the reality of what they're going to need.
TERESA GHILARDUCCI: We have a lot of examples in America right now about how to manage that. If you are in a pension plan at work. And it promises to pay you a supplement to Social Security for the rest of your life, you have a rule of thumb. It's this weirdness where we have put our young people into this 40 year experiment of do-it-yourself, where it becomes all overwhelming.
It doesn't have to be that complicated. Longevity risk is solved for by an inflation indexed annuity. That's Social Security. Long term care, that can be dealt with insurance, as well. So for a young person today, I suggest really paying attention to how the government and government programs are your most important financial partner.
And make sure you vote for politicians who care about climate change and who also care about your financial future. The other thing families can do-- I gave my nephew five hours with a financial planner when he graduated from college. And all of his friends wanted that graduation gift. You want to give young people agency, like they feel now with climate change.
SURYA KOLLURI: That's a great idea. If I could add two more thoughts. One is, I think, there's power in peer-to-peer coaching. So, for example, if I were as a more senior person set a new employee down. And say, you must do these things.
It may not go across as well as a peer saying, hey, I went through these things for the last couple of years. Here's how it works. Another technique would be having a little faith in technology that says if you think about Netflix, and says people like you who watch this, watch that.
So having some kind of a context based guidance that says folks of your gender, your education, your age, have been doing these things, just not as a forcing function, but as information.
RACHELLE AKUFFO: And just quickly because I saw that look on your face where you talked about AI and technology in this space. If I could just get a quick word from each of you, how do you see I and some of, perhaps, the best tools to reshape how we view retirement, [? though? ?]
BOB POWELL: So I'm not a big fan of AI in its current form because when we ask it personal finance questions, it gets some things right, some things wrong. And then there's some material omissions. It will evolve, and maybe it will get better. What I see it is, perhaps, as what WebMD did for medicine and doctors it may do for the advice profession, which is to give people some working knowledge so that their eyes won't glaze over when someone mentions annuity.
RACHELLE AKUFFO: And Teresa what are your thoughts?
TERESA GHILARDUCCI: About AI, it's not there, at all. But it probably could put together a nice portfolio. But how much you should save for is such a personal and psychological question because we don't have systems that are simple.
We know that Finland, Iceland, the Dutch system have the best pension systems on Earth. They have a very robust Social Security system. Those other systems actually have long term care insurance, kind of paid for too. So instead of like having conversations about how individuals can optimally manage their money, we should really think globally about systems.
RACHELLE AKUFFO: And it's true because there is that divide between looking at systems versus sort of this hyper personalized route that AI takes. So what is your take on that? What do you think is going to reshape, perhaps, tech and resource wise, how we look at retirement in the future?
SURYA KOLLURI: I'd like to style myself as a clear-eyed optimist. I think it's humans with technology providing enhanced advice. Anything that can be automated, like portfolios, as Teresa was mentioning, you could use technology.
But when it comes to the more soft trust, estates, caregiving, long term care, you might need the humans. We want to provide advice at scale. And you could if-- when technology gets right, and leveraged properly, you could provide advice at scale.
BOB POWELL: There is one thing I might want to add. It's not related to AI so much as what young people should be investing in at the moment. And it should be their careers. And that gives them the best opportunity to improve their human capital, which is when you're in your 20s, probably your greatest asset at that moment is your earnings power.
RACHELLE AKUFFO: And are we talking types of careers? Are we talking starting salaries, or?
BOB POWELL: It could be anything, but keep investing in yourself because that will give you the greatest chance to create income that you'll need in order to save, perhaps, for your desired standard of living.
TERESA GHILARDUCCI: It's really important for young people to know how to negotiate their first salary or keep on negotiating salaries. But if they also have to worry about their portfolio, and their IRA, or whether it's a Roth or not, then they are taking away from actually what they should be doing.
BOB POWELL: And given that their financial capital is so small, relative to their human capital, it's probably a mismatch of time if you're spending more time on that than you're investing in your career.
