How many listicles have we seen outlining the differing wants between millennials and their baby boomer parents?
For example, parents love watching prime time TV on their large screen smart TVs. Millennials binge watch complete series from streaming services on their smart phones.
Baby boomers get their news from some nightly network news anchor. Millennials just look at their social media feeds (usually GIFs on Buzzfeed because they don’t like to read).
That’s probably not going to change, much to the dismay of ABCCBCNBC and the cable carriers. Millennials, like every generation before them, forge new paths and don’t look back. Baby boomers can only remember when they did the same thing.
In much the same way, financial service professionals seem to be developing a consensus that millennials are forever changing the retirement industry. For example, they point to the popularity of using Roth retirement plans as opposed to tax-deferred options for their preferred retirement savings vehicle (see “5 Reasons Why Roth Plans are More Popular with Millennials than Baby Boomers,” FiduciaryNews.com, August 2, 2017).
We seem to think this generational change is set in stone, much like how baby boomers talk on the phone while millennials silently type away all day snapchatting with their friends.
But, what if we’re miscalculating this Roth trend? What if the proclivity to use Roths has more to do with one’s age rather than one’s age group?
The data tells us this: People below the age of 45 tend to save more in Roth vehicles than in tax-deferred vehicles. The opposite is true for people above the age of 45.
Now consider these facts. Salaries peak after age 45. At the same time, those in their 50s are seeing their big-ticket deductions (mortgage and children) “aging” out, leaving them with a higher tax burden even though their salary has levelled out.
What does that mean? It means the value of the tax deduction has grown compared to their financial reality from just a decade earlier.
There are many good reasons to use a Roth. There are just as many good reasons to use a traditional tax-deferred vehicle.
Indeed, most financial planners will tell you having both gives you greater flexibility to managing your tax liabilities and Social Security claiming strategy in your post retirement years.
That being said, there is a fundamental mathematical process one can use to determine whether it’s best to use a Roth or a tax-deferred savings option.
And it’s all based on your current year’s tax situation.
None of the above has anything to do with one’s generational status. It does, however, have much to do with one’s combined career and lifestyle arc.
As you age, your salary creeps up, which means your marginal tax rate creeps up. At the same time, your available deductions trend downward. The net result is you are more likely to want to save via a Roth when you’re younger (while a lower salary and larger percentage of deductions lowers your tax rate).
On the flipside, you are more likely to want to take advantage of the tax-deferred savings when you are older (when a higher salary and a lower percentage of available deductions pushes you into a higher tax bracket).
Of course, if the real reason why someone finds Roths attractive is because it means the IRS is forever out of their hair, that’s something else altogether. And that’s certainly something that appeals to all generations!