Boomer Retirement Advice to Kids: Don't Do What I Did

The children of baby boomers score low on financial literacy tests, but they have one thing right when it comes to money: More young adults in the workforce are saving for retirement than any generation that came before them.

The amounts they are putting in funds are still low, so it's no guarantee of success. To be sure, the new generation of savers faces a challenge in building a nest egg when investing choices are bleak: Do they go with risky stocks or super-low bond yields? Is there any other choice?

Increasingly, they are going back to their parents with questions about savings plans. When they do, it's creating a familiar dilemma for many baby boomers--another potential "Don't do what I did, do what I say" situation like bad grades and partying.

What should parents say? "It's difficult," says economist Anthony Webb of The Center for Retirement Research at Boston College. "Young people should not be made to feel bad if they are not doing enough for their retirement. Nobody wants another lecture."

He says some of the popular literature on the topic is often not very helpful and worse, misleading, with either get-rich-quick schemes or homespun myths from the old school--sometimes both in the same package.

[Read: How Some Financial Experts May Be Misleading Consumers.]

"These people write books saying if you just cut out a cup of coffee a day and invest it in the stock market, you can make millions over the years. First of all, it's not true. Second, it's up to individuals to make their own priorities," says the British-born economist. "And it's impertinent of me to say coffee is less important than something else."

Financial literacy overrated. Experts also say it's not clear exactly how much financial knowledge younger savers actually have. Webb does not put much stock in those financial literacy tests, either, since they often focus on arcane issues that have little bearing on the basics of saving money. "For most of us, it's a matter of following simple rules to save money and get advice," Webb says.

When young adults do ask parents for their two cents on saving, they often do so with a heavy dose of skepticism, says Lisa Szykman, associate professor at William & Mary School of Business, who has run focus-group research exploring young adults' personal finance behavior. They are likely to filter out stories that sound too facile, or just too parental. Support and encouragement in the right measure, however, could be the right tactic, she says.

"The good thing is that they are putting away money, and that's positive. But they are already feeling like it's never going to be enough," says Szykman. "They are getting discouraged, and those who lost savings in the market in recent years feel like it was a bait-and-switch."

White lies and real saving. At the root of the skepticism is the pervasive view among young people that they will never get the breaks of previous generations. In some cases, they will mistrust parents whom they feel squandered opportunities in boom times, she says, while others from wealthier upbringings may think their family's good life is hopelessly out of reach.

Doug Lockwood, a financial planner at Hefty Wealth Partners in Auburn, Ind., says he is having many more conversations with clients lately about young people saving money--although mostly these involve affluent parents expressing their fears over how their grown children will get by in more trying times. Few clients of firms like Hefty are in the under-35 demographic, Lockwood concedes. The bulge bracket is largely a baby-boomer-and-older phenomenon. Or as Webb puts it, boomers are "the python that swallowed the pig," metaphorically speaking.

"The conversation right now is reflective of the times," says Lockwood. "People want to see their kids save more and have less debt. But what young people are seeing with their parents is the product of the great boom of the 1980s and the 1990s and they can't see how they can get it. They want to have the same things. But they do not see the sacrifices that their parents made to get there."

When it comes to parents giving advice, there are good reasons for skepticism. An International Journal of Psychology study released last month found that 84 percent of U.S. parents lie to children get them to do the right thing, especially when it comes to food and money. But experts say "white lies" will not help when it comes to advising grown children on managing savings. Szykman says her research has found that young adults don't know about money but won't accept tall tales. They are "the most media-savvy and skeptical generation ever and they are skilled at getting at the truth," she says.

Fortunately for boomer parents, step one--saving money--has already been taken care of in some cases. New U.S. regulations are pushing retirement plans toward setting up automatic enrollments. So the decision on whether save at least something will often have been made by employers.

"When it's an opt-out [automatic-enrollment plan], it is more like a benefit, and they are more likely to stick with it," Szykman says. "Young people are already so overloaded with information, it's just one more overload if they have to think about getting out, and that means they are more likely to stay put for a while."

[See: 10 Books Investors Should Read.]

Census Bureau statistics show that the percentage of under-35 participation in savings plans is already twice the level of the 1990s, and experts expect it to be higher still with the new auto-enrollment of workplace savings. Experts expect auto-enrollment to boost savings even as young people faces huge challenges in paying back $1 trillion in college debt and finding solid footing in a difficult workplace.

One piece of smart advice parents can offer. Another change in retirement plans is that many more are starting to offer Roth-style workplace savings plans. For young people, the Roths are almost a "no-brainer," financial experts say, and parents can offer it as a smart idea that can help maximize early saving. Roths allow savings to grow tax-free and are not taxed at withdrawal time. Traditional savings plans allow tax-free contributions but savings are taxed as normal income at withdrawal.

"This is especially good for young people in lower tax brackets who don't need the deduction as much right now," says Lockwood. "They can really capture the full benefit of long-term savings plans."

[Read: Should You Switch to a Roth 401(k)?]

And with the first step completed by auto-enrollment, parents can step back from dispensing stern warnings about the life of ruin that non-savers face.

"People are afraid already," says Webb, facing, as they are, a difficult economy and a tough workplace. "The trouble is that fear is not a call to action. Fear is a justification for hunkering down and doing nothing."

With high-achieving millennials, Lockwood suggests another subtle tactic to help to jar the competitive instinct that already got kids through college, or put them into the workforce, which is no small feat. "You can let them know the reality," says Lockwood. "If you don't start early putting saving funds into your spending priorities, you are going to have a hard time later catching up to everyone else."

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