What’s Next?

In just a couple of weeks, tens of thousands of students (including a daughter of mine) will graduate from college. For most, it’s a journey of joys, trials and tribulations, an education, not just from a textbook or a professor’s wisdom, but the insights that one can only get from actually living through a different stage of life. Those students set out upon that journey years ago, and, doubtless following careful deliberation and the counsel of friends, families, and a few trusted advisors, a course was set. A course that many “adjusted” – by choice and sometimes of necessity – over the course of the last few years, but a course for their future, nonetheless.

Now the question is – what will they do next?

As parents, we spend a lot of time, energy, and money trying to help our children make good choices, but at a certain point, most of us step back, grit our teeth (and sometimes close our eyes), and hope that they do. Those decisions aren’t always the ones we would make – but, ready or not, they are made, sometimes for the better, sometimes not.

Similarly, this industry has expended a lot of time, energy, and money over the years to try and help individuals make good decisions about preparing for retirement. A growing number of individuals are now entering this new stage in their lives, and we ask ourselves, “Are they ready?”

In answer to that question, we can look at their individual situations and make certain projections about that readiness, based on their health, their gender, their income levels pre-retirement, and their likely levels of spending post-retirement, among other things[i]. But what will ultimately matter is what they do next – and that’s a factor not just of how much savings they have (or think they have) at the point of retirement, or the amount of other resources they may have available then (and thereafter), but how those resources are now invested, how they are invested over time, and how - and when – those resources are spent.

The factors that influence those decisions, as well as their results and potential consequences will, of course, continue to be a key focus for EBRI[ii]in the years to come – just as EBRI’s nonpartisan gathering, analyzing, and modeling the impact of behavioral, plan design, and regulatory influences has provided critical insights on those individual preparations for nearly thirty-five years now.

It matters because knowing what this generation does “next” is likely to be an important part of helping the next generation do better.

- Nevin E. Adams, JD

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[i]See EBRI Issue Brief July 2010 for more information on the EBRI Retirement Readiness Rating™ at http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4593. The 2010 update uses the most recent data and considers retirement plan changes (e.g., automatic enrollment, auto escalation of contributions, and diversified default investments resulting from the Pension Protection Act of 2006) as well as updates for financial market performance and employee behavior (based on a database of 24 million 401(k) participants). Results will be updated next month, in our May Issue Brief.

[ii]More information on the EBRI Center for Research on Retirement Income is available at http://www.ebri.org/research/retirement-research-centers/retirement-savings-income/. For information about becoming a Research Partner, contact Nevin Adams, at nadams@ebri.org.

"After" Math

Last week, EBRI Research Director Jack VanDerhei testified[i]before the House Ways & Means Committee on the subject of “Tax Reform and Tax-Favored Retirement Accounts”, a hearing described as considering “…the current menu of options for retirement savings—both with respect to employer-based defined contribution plans and with respect to IRAs.” According to Committee Chairman David Camp (R-MI), the hearing was to “…explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.”

That hearing preceded by just a day Senate Budget Committee Chairman Kurt Conrad’s (D-North Dakota) unveiling of his Fiscal Commission Budget Plan (see link here). That plan[ii]referenced the original Bowles-Simpson Fiscal Commission’s “Illustrative” Tax Reform option under which the exclusion for employer-provided health insurance would be modified, capping its value for five years and then phasing it out over 20 years, while retirement savings accounts would be consolidated, with a cap on tax-preferred contributions.[iii] 

While the prospects for actual legislation ahead of the November election seem unlikely, it is clear that concerns about the nation’s budget deficit will keep tax reform—and the tax status of workplace benefit programs—front-and-center in the weeks and months to come.
Appropriately enough, next month EBRI will host its 70^th policy forum, titled "’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” At this semi-annual policy forum, panels of experts will deal with a variety of pertinent and timely issues, including the potential impact of changes to current tax incentives for employee benefits, and the “true cost” of tax deferrals. 
We’ll also talk about what 401(k)/defined contribution plans are delivering, and what individuals actually do after retirement with respect to their retirement savings, as well as optimal approaches on retirement income designs for defined contribution plans. We’ll even look around the globe for some potential lessons to be drawn from international comparisons.

It’s a day of information, interaction, and networking that you won’t want to miss.

However, seats are limited—reserve your place today. You can’t afford not to.

A copy of the full Policy Forum agenda, and registration information is online here.

- Nevin E. Adams, JD

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[i]A copy of Jack VanDerhei’s written testimony for the House Ways & Means Committee is available online here.

Video of the testimony is available in two sections, Part 1 and Part 2.

Additional information regarding the Ways & Means hearing is available online here.

[ii]See page 11, online here.

[iii]Last year an EBRI Notes article (July 2011, online here) analyzed the potential impact of those kind of changes on retirement savings.

Titanic Proportions

This weekend marks the 100th anniversary of the sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner. Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden—and only—voyage, it carried 2,244 people, 1,514 of whom would perish as a result of a decision to carry only enough lifeboats to accommodate about half those on board. Despite that, the tale of Titanic’s closing hours is generally one of an orderly, “women and children first” evacuation, with the band playing on while passengers stood in line and waited their turn.

In an NPR report this week titled “Why Didn’t Passengers Panic on the Titanic?” David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that also sunk at about the same time. Both involved luxury liners, both had a similar number of passengers and a similar number of survivors. But on the Lusitania, passengers panicked—and the survivors were mostly those who were able to swim and get into the lifeboats. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.”

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the importance of starting to save early, establishing a plan, and having a goal all fit within the moral of that example: Act while you have time, as you may not always have all the time you need, or the resources to take advantage of it. But what kind of time do Americans have?
The concept of measuring retirement security—or retirement income adequacy—is an extremely important topic, and EBRI has been working with this type of measurement since the late 1990s. When we modeled the Baby Boomers and Gen Xers in 2012, approximately 44 percent of those households were projected to have inadequate retirement income for basic retirement expenses plus uninsured health care costs; so the glass is more than half full, but just a bit. That’s a big percentage, but it’s still an improvement of 5‐8 percentage points over what we found in 2003, when the glass was, indeed, half empty. The improvement occurred despite the impact of the 2008 financial crisis, and the subsequent “great recession.”

In part, that is because the passage of time allowed more funds to be saved, but that improvement is largely due to the fact that in 2003 very few 401(k) sponsors had automatic enrollment (AE) provisions in place, and participation rates among the lower-income workers (those most likely to be at risk) was quite low. However, with the uptick in adoption of AE the past few years after passage of the Pension Protection Act (PPA), participation rates have often increased to the high 80 or low 90 percent—and that stands to make a big difference in shoring up the retirement financial security of many of those who need it the most. In fact, EBRI simulation results show that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a plan design relying on voluntary enrollment, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent.

The tragic loss of life on the Titanic is generally attributed to a shortage of lifeboats, while on the Lusitania, it was the lack of time to get people into the lifeboats available. For many of those looking ahead to retirement, plan design changes such as automatic enrollment and contribution acceleration look to be a real retirement life-saver, as they encourage both early action and the effective use of time.

- Nevin E. Adams, JD


While the lack of retirement income adequacy for the lowest-income households is a matter of concern, so is the rate at which they will run “short” of money during retirement. Indeed, as documented in our July 2010 Issue Brief (“The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects,”41 percent of early boomers in the lowest income quartile could run short of money within 10 years after they retire.

More information is included in recent testimony by Jack VanDerhei, EBRI research director, before the Senate Banking Committee, on "Retirement (In)security: Examining the Retirement Savings Deficit" (T-171), available online here.

Planning Ahead

April is Financial Literacy Month, and National Retirement Planning Week, sponsored by the National Retirement Planning Coalition (of which EBRI’s America Savings Education Council (ASEC) is a member) is April 9–13. Both events serve to remind us all of the importance not only of saving, but of establishing specific goals for saving.

I was pleased, therefore, this past month to help one daughter set up her first SEP-IRA—and even more pleased to about the same time learn that my other daughter was, of her own volition, making a conscious effort to set aside what seemed to her father to be a fairly substantial portion of her modest income in savings. These are things I knew to do when I was their age, of course, but things I must admit took me a few years to act on.

It’s easy, in the normal press of life, to put off thinking about retirement, much less thinking about saving for a period of life many can hardly imagine. We all know we should do it—but some figure that it will take more time and energy than we can afford just now, some assume the process will provide a depressing, perhaps even insurmountable target, while others don’t even know how to get started (see Goals Tending).

Here are five reasons why you—or those you care about—should save for retirement now:

Because you don’t want to work forever.

If you want to stop working one day, you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t free.

Many people assume that expenses will go down in retirement—and, in fact, a recent EBRI Issue Brief ) noted “With the age 65 expenditure as a benchmark, household expenditure are lower by 19 percent by age 75, and 34 percent by age 85….” On the other hand, there are changes in how we spend in retirement as well—and they aren’t always less. That same EBRI report notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. “Health care expenses capture around 10 percent of the budget for those between 50–64, but increase to about 20 percent for those age 85 and over.” And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think:

Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that has more than tripled, to 37 percent. Those expectations notwithstanding, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure (see “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings”).

Because you don’t know how long you will live:

People are living longer and the longer your life, the longer your potential retirement, particularly if it begins sooner than you think. Retiring at age 65 today? A man would have a 50 percent chance of still being alive at age 81 (and a woman at age 85); a 25 percent chance of living to nearly 90; a 10 percent chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

What are you waiting for? A good place to start is the BallparkE$timate,® and with the other materials available at www.choosetosave.org

- Nevin E. Adams, JD


More information about National Retirement Planning Week is available online here.

Information about the Spring 2012 American Savings Education Council (ASEC) Partners Meeting, with a focus this year on retirement planning is available online here.

“Generation” Gaps

If you think it’s complicated trying to determine an individual’s retirement funding needs, imagine trying to do so for all American workers. That was the topic of a Senate Banking subcommittee hearing last week titled “Retirement (In)security: Examining the Retirement Savings Deficit,” at which EBRI Research Director Jack VanDerhei was asked to testify.(1)

When EBRI modeled the retirement savings gap of Baby Boomers and Gen Xers earlier this year, we found that between 43 and 44 percent of the households were projected to be at risk of not having adequate retirement income for BASIC retirement expenses plus uninsured health care costs—though that was 5–8 percentage points LOWER than what we found in 2003. That’s right: In terms of that retirement savings gap, American households are better off today than they were nine years ago—even after the financial and real estate market crises in 2008 and 2009.

Measuring retirement income adequacy is an extremely important and complex topic, and one that EBRI started to provide back as far as the late 1990s. Our recent projections indicate that the average individual deficit number (for those with a deficit) ranges from approximately $70,000 for families, to $95,000 for single males, to $105,000 for single females.

Stated in aggregate terms, that would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. That’s a large number, to be sure, but still considerably smaller than some of the projections that have been put forth.

Here are four things that are sometimes overlooked that help explain the “gaps” in retirement projection gaps:

Some won’t have a retirement

The reality is that some people won’t make it to retirement. On an individual level, we may not know who they are, but in the aggregate we can project the impact with some precision.

You can’t ignore the impact of uniquely post-retirement expenditures.

Health care costs—and post-retirement health care costs particularly—remain a potential source of underplanning, both for retirement and retirement projections. The reality is that we spend differently in retirement than we do before retirement. Moreover, the costs of care, and particularly care such as nursing home and/or long-term care, loom large. And many won’t think or insure for that risk until it’s too late.

Tomorrow’s retirement will be funded differently.

Looking back, even only a few years, assuming that the income sources of current retirees will be available to future retirees glosses over the reality that a major shift in emphasis in retirement plan design has taken place. In the future, the proportion of retirees receiving traditional pension income will almost certainly decline, and the percentage relying on defined contribution savings (primarily 401(k)-type plans) as a primary source of post-retirement income is certain to increase. Projecting future retirement income flows based on the experience of today’s retirees is certain to miss the mark.

We’re already saving “better.”

Thanks to the growing popularity of automatic plan design trends—automatic deferrals, contribution acceleration, qualified default investment alternatives—many of today’s retirement plan participants are already saving earlier and investing more age-appropriately than ever before. There’s no reason to assume these trends won’t continue to extend and expand going forward. Projections based on pre-Pension Protection Act defined contribution trends are relying on yesterday’s news.

- Nevin E. Adams, JD

(1) Video of the hearing is available online HERE. Dr. VanDerhei’s testimony is available HERE