Are you giving your employees bad retirement advice?

Most millennial and Gen Z employees are in for a rude awakening when they retire because they aren't saving enough and they're getting bad tax advice, according to the head of a Phoenix-based wealth management firm.

Employees born in the 1981-to-2012 millennial and Gen Z eras just aren't as concerned about retirement planning as their parents and grandparents were, says Stewart Willis, president of Asset Preservation Wealth & Tax. He says the attitude difference is quite noticeable in the clients at his firm, which has offices in Indianapolis, Las Vegas and Portland, Oregon, in addition to Phoenix.

"As the clients get younger, we're realizing people just aren't saving enough," Willis says. "They just don't place the same importance on retirement."

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Millennial and Gen Z clients seem "way more concerned with things and impressing friends before their bank account," he says. "The people that come in here with watches and cars and just fancier than hell, are generally of the big hat/no cattle concept. It's hard to get people to shake that loose."

His firm has tried to encourage its Baby Boom and Gen X clients — those born between 1946 and 1980 — to teach the next generations early on about taking full advantage of employer matching while also contributing more than just 5% to their 401Ks.

"We want our clients to bring their kids in to get them conditioned for saving," Willis says. "Once they're 16 and up, they can start having real conversations."

Companies also need to take responsibility for teaching their employees how to save, and for providing millennial and Gen Z employees with better access to tools that can show whether their retirement savings are on track, he says. "They just don't have any real direction because employers are scared to give advice because they don't want liability for it."

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A lot of the mainstream advice to millennials and Gen Z, as well as Gen X, overlooks potential tax efficiency issues, Willis says. A glaring example is the mantra that employees should make tax-deferred contributions to their retirement accounts, which is often bad advice, even when accounting for the compounding investment returns of those contributions, he says. 

Instead, in most cases employees should pay the taxes when they make their contributions so they can withdraw the money tax-free when they've reached retirement, he says. That's because they'll likely be in a higher tax bracket once they hit retirement.

Enjoying tax savings when the contributions are made "is like a dopamine fix" for employees, Willis says. "They love the immediate response to seeing tax savings, but I think it hurts them long term."

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For employees who make tax-deferred contributions, Willis says, "if you actually succeed in retirement, you're going to save paying a 12% tax rate today to pay 24%, 32% later." Many retirees are so averse to paying taxes that they resist taking retirement account distributions, he says, plus they're probably going to be paying taxes on $1 million to $2.5 million in Social Security benefits over the span of their retirement.

"We're in one of the most efficient tax windows in American history for the middle class right now," he says. "Don't defer it. Pay the taxes now while they're on sale so that you can enjoy it in retirement."

Companies can do their part by offering more non-tax-deferred Roth 401K accounts to employees, and by making the Roth accounts they already offer more accessible, Willis says.

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Companies should also hire fiduciaries to give seminars at the workplace — not to pick up clients, but to educate employees about making the pay-taxes-now-or-later decision, Willis says.

"Millennials and Gen Z are looking for help; they can't find it," he says. "See what you can do as a company to get them informed. Have real tax conversations with them."