By Robert Dixon
More than half of Gen X and Gen Y consumers admit having little or no knowledge about investments and financial products, according to a recent LIMRA study.
The study supports the notion that “improving general financial literacy could lay the groundwork for retirement knowledge. Too few consumers understand basic financial concepts and this lack of knowledge can hinder their savings efforts,” said Cecilia Shiner, senior analyst at LIMRA Retirement Research, in an email interview.
The study found that Gen X and Gen Y consumers who work with financial advis0rs are more likely than those who do not to be very knowledgeable about investments and financial products (14 percent versus 6 percent). Yet only one in five work with a financial professional.
“Married Gen X and Gen Y consumers are very slightly more likely than unmarried Gen X and Gen Y consumers to be very knowledgeable (8 percent versus 6 percent),” Shiner said. “Gen X and Gen Y consumers who have graduated from college are more likely than those who have not to be very knowledgeable about investments and financial products (9 percent versus 5 percent).”
Baby boomers are slightly less likely to indicate that they are “very knowledgeable” about investments and financial products than Gen Xers and Gen Yers, Shiner said in the interview. Four percent of baby boomers (non-retired consumers aged 48-66) report being very knowledgeable compared with 7 percent of Gen X and Gen Y consumers. However, Baby Boomers are less likely than Gen X and Gen Y to indicate that they are “not at all knowledgeable” (18 percent of baby boomers versus 21 percent of Gen X and Gen Y consumers), Shiner said. She noted that comparisons to baby boomers were not a part of the current LIMRA analysis.
“The increased knowledge levels could be related to education efforts on the part of financial professionals, or the fact that more knowledgeable Gen X and Gen Y consumers work with financial professionals,” Shiner said.
LIMRA’s research found that among Gen X and Gen Y consumers with access to a defined contribution (DC) plan through their employer, those who have never made contributions are more likely to feel less knowledgeable about investments and financial products than those currently contributing to their DC plan. This finding suggests that if financial literacy could be improved for these consumers, the likelihood of participating in their employers’ DC plans may rise.
“I think that a lengthy retirement horizon and competing demands on income are the primary reasons why more Gen X and Gen Y consumers are not saving for retirement,” Shiner said. “They are not prioritizing retirement saving. Less than half (46 percent) of Gen X consumers and only 3 in 10 (31 percent) Gen Y consumers cite retirement as an important reason they are saving. This leads us to believe that immediate and near-term spending obligations appear to be taking precedence over long-term needs for Gen Y consumers,” she said.
The study also found that the market opportunity to offer retirement products and insurance to Gen X and Gen Y households is growing. Some 43 percent of the nearly $3 trillion in Gen X household financial assets is invested in retirement and pension accounts, based on an analysis of the Federal Reserve Board’s 2010 Survey of Consumer Finances. Two thirds of retirement and pension account assets are held in DC savings plans and 30 percent are in IRAs.
On average, Gen X consumers have contributed to their current employer’s DC plan for nine years, accumulating nearly $70,000. The median income deferral rate is 6 percent for all Gen X consumers, slightly higher for men (7 percent). Given that Gen X consumers are over age 30, their income deferral rates are typically recommended to be above 10 percent. However, less than half (43 percent) are contributing 8 percent or more, LIMRA reports.