Guess Work?

Last week a reporter asked me what finding in the 2013 Retirement Confidence Survey¹most surprised me, before acknowledging that maybe there wasn’t anything to be surprised about in a survey that has now been conducted for nearly a quarter century.Sure enough, finding that retirement confidence is (still) at an all-time low stands out when you consider that is based on sentiments over a 23-year period.² Of course, you’re also able to note that it wasn’t that long ago (2007) when those sentiments were at an all-time high.

As it turns out, the finding that stood out most to me in this year’s RCS was the response to a new question. While we have long asked about individual savings levels, and how much workers thought they would need to have accumulated by retirement in order to achieve a financially secure retirement, this year we also asked what percentage of their total household income they thought they would need to save each year from now until retirement so that they could live comfortably throughout retirement.

Granted, the most common answer—cited by 23 percent—was “don’t know/refused.” But the second-most common response was….20 percent to 29 percent.

That was an eye-opener to me. Not because we see much evidence that most individuals are actually saving at that rate³—but it does at least suggest that individuals are beginning to take seriously the amount of savings that might be required.

On the other hand, one of the RCS findings that never ceases to surprise me is the percentage of workers who say that they have ever tried to calculate how much they need to save for a comfortable retirement. This year 46 percent had done so—and while that’s less than half, it was higher than we’ve seen the past couple of years, and it was better than we’ve seen in most of the years since 1999 that we’ve asked that question (the all-time high was 53 percent in 2000).

Muting the positive message that trend might imply was the reality that those calculations often aren’t a sophisticated undertaking. Indeed, workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic retirement-needs calculation. Eighteen percent indicated they did their own estimate and another 18 percent asked a financial advisor, while 8 percent used an on-line calculator. Another 8 percent merely read or heard how much was needed.

Which brings to mind the following: Are the savings projections so high because so many workers hadn’t done a savings needs calculation? Or have they avoided doing a savings needs calculation because they thought the results would be too high?

In either event, it’s likely that their retirement confidence—and their savings goals—would be well-served by taking the time to do an actual assessment. Here’s hoping the release of this year’s Retirement Confidence Survey inspires them to do just that.

Nevin E. Adams, JD

¹ See EBRI’s “2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many,” on-line here.

² For some other interesting RCS trendlines, check out this post.

³ In fact, only 8 percent of the 2013 RCS worker respondents cited as a target the 0–8 percent that many industry surveys suggest is the most common savings rate (though that often doesn’t take into account the impact of the employer match).

Confidence Builders

I’ll never forget my first day of driver’s ed class. This was at a time when it was still part of the “regular” school curriculum, and we were placed in groups based on whether or not we had actually driven a car before. Now, at the time, the extent of my driving was no more than backing the family car up and down our short driveway. But driving looked easy enough, and my friends were in the “having driven” group, so I confidently “fudged” the extent of my experience and shortly found myself behind the wheel of the driver’s ed class car, along with my high school basketball coach/instructor and a couple of my friends in back.

To make a long story short, there was quite a bit of difference between backing a car up and down a driveway and navigating a car on the open road. And, but for the extra brake on the instructor’s side of the vehicle, I might have spent my first driver’s ed class waiting to be pulled out of a ditch, my confidence notwithstanding.

The recent release of the 23^rd annual Retirement Confidence Survey (RCS) got a LOT of attention.¹ The headlines were mostly about Americans’ lack of confidence in their prospects for a financially secure retirement; indeed, the percentage “not at all confident” hit an all-time high for the RCS, while the percentage “very confident” remained at the all-time low it notched a year ago. A striking number of inquiries about the report focused on what could be done about retirement confidence.

Building "Blocks?"

As it turns out, there are several things that the study linked to higher confidence: having more retirement savings is perhaps the most obvious connection, and so is participation in a workplace retirement savings plan (which was also linked to larger savings balances²). However, the RCS also found that something as fundamental as having taken the time to do a retirement needs assessment made a positive difference in confidence³ – even though those who had done such an assessment tended to set higher savings goals.⁴ However, fewer than half of workers responding to the RCS have completed this assessment, and many of those who have made an attempt to figure out how much they might need – guess.⁵

Still, asked how much they need to save each year from now until they retire so they can live comfortably in retirement, one in five put that figure at between 20 percent and 29 percent, and nearly one-quarter (23 percent) cited a target of 30 percent or more. Those targets are larger than one might expect, and larger than the savings reported by RCS respondents would indicate. They do, however, suggest that some are beginning to grasp the realities of their situation – a realization that could be weighing on their confidence in the future, even as it lays the foundation for change.

Because, what really matters is not how confident you feel, but whether you have a reason to feel confident.

Nevin E. Adams, JD

¹See The 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many

² According to the 2013 RCS , workers who participate in a retirement savings plan at work (45 percent) are considerably more likely than those who are offered a plan but choose not to participate (22 percent) or are not offered a plan (18 percent) to have saved at least $50,000. These participants are much less likely than others to report having saved less than $10,000 (20 percent vs. 46 percent who choose not to participate and 50 percent who are not offered a plan).

³ A great place to start figuring out what you’ll need is the BallparkE$timate®, available online at www.choosetosave.org. Organizations interested in building/reinforcing a workplace savings campaign can find a variety of free resources there, courtesy of the American Savings Education Council (ASEC). Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

⁴ The RCS found that 31 percent who have done a calculation, compared with 14 percent who have not, say they are very confident that they will be able to accumulate the amount they need, while 12 percent who have not done a calculation, compared with 3 percent who have, report they are not at all confident in their ability to save the needed amount.

⁵Workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic, retirement needs calculation, according to the RCS, while 18 percent indicated they did their own estimate, another 18 percent asked a financial advisor, 8 percent used an on-line calculator, and another 8 percent read or heard how much was needed.

"Show" Time

Though there’s precious little worth watching on television these days, I’ll confess to having developed a fondness for the Sunday night shows that have sprung up all over cable television—series like Downton Abbey, Mad Men, Hell on Wheels, and yes, The Walking Dead. These not only keep me up on Sunday nights, but looking forward to the end of the weekend.

The “hiatus” gaps between these cable seasons are long enough that it can be hard to remember where the story line left off, though these days the standard seems to be to pick up the characters’ lives at a different point in time. Downton Abbey closes one season at the start of WWI, and opens the next in the middle of that conflict, for example—or Mad Men closes a season with the key characters having decided to split off from a stifling new British parent firm, and the next season opens with their new venture already operating as a full-fledged advertising firm. These storyline “jumps” can be a bit disorienting, but time (and the storyline) marches on.

A year ago, the Retirement Confidence Survey, conducted by EBRI and Greenwald & Associates, found that Americans’ confidence in their ability to afford a comfortable retirement was weighed down by concerns about the economy and job security, “stagnant” at record low levels. Those who participated in workplace retirement savings plans were more confident, as were those who had taken the time to estimate their retirement savings needs. A growing number of current workers were planning to work past the traditional retirement age of 65—and yet, in reality, most current retirees had left the workforce earlier than planned, usually for reasons beyond their control.

Since then, we’ve had a presidential election, seen the Supreme Court uphold a new federal health care law, crept up to the edge of a fiscal cliff (and stumbled back a bit), seen unemployment rates stabilize, and stock markets gain ground. How might those events impact or influence Americans’ preparations or retirement confidence? Have they sought—and followed—professional guidance? How much DO Americans think they need to save? And how much progress have they made?

For almost a quarter-century now—with no hiatus—the RCS has meticulously tracked the evolving trends in Americans’ confidence about retirement. Next week we’ll unveil the results of the 23rd annual Retirement Confidence Survey (RCS), the longest-running annual retirement survey of its kind in the nation. You can count on it providing some fascinating insights on where workers and retirees are, where they’ve been, and where we all need to be—with a growing sense of where we want to be tomorrow.

- Nevin E. Adams, JD

Note: The results of the 2013 Retirement Confidence Survey (RCS) will be available at 8 a.m. ET on Tuesday, March 19, at www.ebri.org Information and findings from prior surveys are available at www.ebri.org/surveys/rcs/2012/

"Control" Group

Last week I was speaking at a conference on the West Coast when a weather pattern emerged that threatened both my connecting flight, and my arrival at home. Alerted to the potential problem, I began seeking alternatives. Eventually, I was able to reroute my connecting flight—though doing so meant a later arrival at my home airport and, based on the trajectory of the storm, that later arrival increased the likelihood of running into problems there.

I continued to check in back home during the day—trying to gauge the storm’s progress, and to (re)evaluate my alternatives. As I boarded that final leg of the trip home, I knew a couple of things: The flight was (still) departing on time, and while it wasn’t snowing at home (yet) the forecast was now for more snow, starting later. The trip home wasn’t exactly restful (despite the hour), but having done what I could to minimize the impact of the storm on my travel, having attended to the things I could control, I boarded the plane, hopeful that the combination of my new route home, the pilot’s skill, and the storm’s track would result in a satisfactory, if somewhat stressful, conclusion.

Earlier this year EBRI was approached by Money Magazine to use the EBRI Retirement Security Projection Model® (RSPM)¹ to evaluate a number of potential retirement preparation scenarios, taking into account varying levels of household income, debt, marital status, retirement plan participation, health, etc. Selected results from that analysis, published in the March issue (see “Dream Big, Act Now: Six Secrets of Retirement” online here), showed the impact that various factors could have on the chances of running short of money in retirement.

Real as those factors are, many of life’s circumstances are completely beyond our control. However, some of the most important factors—including the decision to participate in a workplace retirement plan, or the amount we choose to save—are not. Consider a 45-year-old female worker who is currently making $50,000/year, with a current retirement savings balance of $50,000. Applying the RSPM model,² we find that if she contributes 1 percent of pay to her retirement savings each year, there is a 61 percent chance that she’ll run short of money in retirement. On the other hand, a 10 percent annual contribution rate (which could be her’s along with an employer match) reduces that probability to 38 percent, while a 15 percent annual contribution rate reduces that risk to just 1 in 4 (see chart below).

My flight home from the conference was never risk-free, even before Mother Nature decided to throw a wrench into my carefully designed itinerary. That said, having the potential problem highlighted early enough allowed me to take steps to avoid the worst of what surely would have been a very long and arduous flight home, arriving home two hours later than I had originally planned, but well ahead of my likely arrival had I stayed on my original flights.

Much of today’s retirement planning tends to focus on things over which we, as individual retirement savers, have no control—things like investment returns. Perhaps those looking for true retirement serenity might, like those who invoke the so-called “Serenity Prayer,” be better advised to seek “the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference.”

- Nevin E. Adams, JD

¹ RSPM grew out of a multi-year project to analyze the future economic well-being of the retired population at the state level. After conducting studies for Oregon, Kansas, and Massachusetts, a national model—the EBRI Retirement Security Projection Model® (RSPM)—was developed in 2003, and by 2010 it has been updated to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010 (based on a database of 23 million 401(k) participants).More information, and a chronology of the RSPM is available online here.

² This application of the RSPM assumed stochastic returns with an average of 8.9 percent for stocks and 6.3 percent for bonds.

Spend "Thrift"

Having now lived in our new home long enough for most of the extraordinary expenses to emerge, and for the costs of living in a different place to become “normal,” my wife and I recently sat down with a financial planner to update our retirement plan(s). Having gathered the requisite documents regarding retirement savings, insurance, wills, and investments, we turned to our current budget and spending patterns.

Retirement remains a relatively distant goal—but we are at a point in our lives where we can see the end of certain expenses (college tuition for the kids, the mortgage on the house), and the need for different, and potentially higher, levels of expenditure on others (insurance, long-term care). And, while we’ve long done budgets, established goals, and set aside funds to meet long-term objectives, retirement planning—as those who have undertaken to do so can attest—takes that focus to a whole new level, as you begin to take into account different sources of income, as well as expenses.

A recent EBRI Issue Brief (see “Income Composition, Income Trends, and Income Shortfalls of Older Households,” online here) examined the trends in income and spending among older American households. Not surprisingly, for all age groups above 65, Social Security remains the primary source of income, and by significant amounts. Consider that in 2009, households ages 65–74 and households with members age 85 or above received 54 percent and 66 percent of their total household incomes, respectively, from Social Security benefits. Moreover, the proportionate importance of Social Security income increases with age.

Additionally, income from pensions and annuities (including distributions from IRAs) is the second-largest source of income for older households. In 2009, households ages 65–74 received 17.1 percent and households above age 85 received 15.3 percent of their incomes from pensions and annuities.

As you might expect, the sources of income, and their proportionate contributions, varied over time—but the report noted that more than half (about 60 percent) of elderly American households do not yet appear to be “decumulating,” in that they spent less than their incomes. On the other hand, there were some—in 2009 more than 14 percent of older households—who spent considerably more than their income: 175 percent, in fact. Of some concern, the EBRI report noted that households that face income shortfalls not only tend to have much lower levels of assets, they spend down their liquid assets at a faster rate than households with no income shortfalls.

We should expect to spend more than we “make” (in the form of new income) in retirement. That’s why reliable “new” income sources in retirement, whether Social Security or pensions, systematic withdrawals from 401(k)s or IRAs, are so important, especially as “old” sources (such as that regular payroll check) fade away—certainly if you don’t want to run out of retirement income before you run out of retirement.

- Nevin E. Adams, JD