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Bridging the generation savings gap

1015 storyWhile the younger generation is facing new financial challenges, there are plenty of old school strategies and new solutions to help them make the most of their finances.

Saving came easy for Jeff Wagner.

“I’ve paid for everything I had since I was 11 years old. My dad was a bricklayer. I came from a family of six, so I was used to budgeting my money. It was a natural thing,” he says. In his opinion, it just takes discipline to save.

Jeff retired in 2004 after 32 years teaching in Milwaukee Public Schools (MPS). He was able to retire at 55 because financially it worked for him. He had over 30 years in the district and a 403(b) to “backup” his WRS pension.

Jeff credits a veteran teacher for starting that 403(b) early in his career. “He grabbed me by the neck so to speak, sat me down, and said, ‘Instead of spending your money on stuff you don’t need, you’re going to put that money in a 403(b).’ I signed up and it was the best thing I did.”

Jeff also didn’t miss a chance to pass that information on. He was a union rep for the next 30 years and made it his mission to talk to every new teacher about saving. “I’d say, ‘If you don’t want to work until you’re 70, open a 403(b).’” He explained to them the rule of 72 (a quick way to calculate how long it will take to double your money) and the power of compounding interest to grow savings. “Take it out of your first pay check. You won’t even miss it. Just let it run.” His advice has not gone unappreciated. He often hears from former colleagues. “They say, ‘Jeff, if you hadn’t talked to me way back when, I wouldn’t have a penny saved today.’”

Like father, like daughter

Meghan, Jeff’s daughter, is 22 years old. She plans to follow in her fathers footsteps and teach at MPS. She has been the beneficiary of many discussions and teaching moments about finances over the years. “My dad is all about fiscal responsibility. He taught me how important it is to save and how important it is to start early.”

Despite her youth, Meghan gets it. She talks candidly and with uncanny resolve about retiring early and building financial security for herself. “She understands more than most and I think she’s onboard. I’ve tried to give her knowledge that she can use the rest of her life. It will make a huge financial difference for her,” Jeff says.

While the basic fundamentals Jeff has imparted to his daughter over the years—budgeting, don’t spend more than you earn, pay yourself first, the time value of money and compound interest—pass the test of time, there are generational differences in economic circumstances that can’t be ignored.

Brenda Echeverria, Financial Planner at WEA Member Benefits, meets with members from ages 22 to 90. “The need for money management skills and the need to save is the same for all generations. But, the economic realities and attitudes about money are distinctly different between them,” she says. For instance, while student loan debt is not a new issue, it is a much more burdensome one. With tuition costs more than doubling in the last 20 years, the amount of debt is far greater for those who borrow for college. The experiences of Jeff and Meghan illustrate the significance of this issue.

That was then...this is now

When Jeff went to college, he didn’t need student loans. “I worked to pay my tuition while I was in college. I lived at home so I had free room and board. There was no need for student loans,” Jeff says.

“Paying for tuition while going to school isn’t even an option for me,” Meghan asserts. “I couldn’t work enough during the year to pay UW-Madison tuition and go to school at the same time. It’s very different than when my Dad went to college.”

Meghan is right. According to the National Center for Education Statistics, the average annual cost of tuition, room, and board at an in-state college in 1976 was $2,647. The average annual cost of tuition, room, and board at an in-state college in 2014 was $22,000.

Today’s students working a minimum wage job ($7.25 per hour) would need to work 8 hours per day every day for an entire year in order to pay for one year’s worth of tuition, plus room and board. Compare that to the 3.4 hours per day you would have needed to work in 1976 at $2.10 per hour to accomplish the same thing. (Calculations assume working 365 days per year.)

So, like 94% of undergraduates nationwide, Meghan had to borrow thousands of dollars and will start her earning years out in debt. It’s a big difference from a generation ago.

“It’s ridiculous the debt these kids are coming out of college with. But, there’s no way around it for most,” says Brenda.

Post Act 10 difference

Numerous changes from Act 10—some mandated and others implemented by districts to help cope with budget cuts—directly affect the take-home pay of today’s public school employees. Here are two examples:

Wisconsin Retirement System (WRS)

Districts used to pay 100% of the required WRS contribution. Wisconsin public school employees are now splitting their WRS contribution 50/50 with the district. The 2015 employee share is 6.8%.

Health insurance

Act 10 mandates that public school employees pay a minimum of 12% of health insurance premium costs. In addition, many districts implemented health plans with deductibles ranging from $2,000–$6,000. “This is not an insignificant expense and a pretty big change for public school employees who for years bargained for better health benefits in lieu of salary increases. Sharing the costs at these levels now definitely presents a financial challenge,” says Brenda.

Despite the added financial hurdles, Meghan still plans to teach. She is going in with her eyes wide open. “I know what I’m getting into. I’ve heard the good and the bad from my parents (her Mom also teaches at MPS) over the years,” she says, “but I really want to teach, to share knowledge, and make learning interesting for kids.”

Meghan will substitute teach at MPS this year while studying for her master’s degree. That income plus living at home will help offset some of her costs.

Seeing past savings obstacles

The financial changes put members of all ages in a tough spot and can prevent them from thinking long term. “Members feel overwhelmed. Often the last thing on their mind is saving, but quite honestly, it’s never been more important for public school employees to save than now,” says Brenda.

Meghan understands the reluctance to save when faced with other financial obligations. “There’s always this thought in the back of my mind that I have to pay off my student loan debt and it makes it hard to think about saving and taking care of the future.”

Still, she knows it’s something she needs to do. If she expects to follow her father’s lead with an early retirement, Meghan’s best chance of achieving that is by saving early. At her father’s encouragement (or insistence) she opened a Roth 403(b) with Member Benefits. She puts in what she can. “My dad taught me that I need to start now to take advantage of the compound interest and exponential growth. The sooner I start, even with a small amount, the better off I’ll be.”

>>Learn about resources and remedies available to help manage these new economic challenges.