Retirement Realities Better Than Pre-Retirement Perspectives

 If you read only the headlines from the latest Employee Benefit Research Institute Retirement Confidence Survey, the takeaway feels familiar: confidence is slipping, worries are rising, and concern about retirement readiness is once again in focus.

Seriously?

Look, once you move past the year-over-year decline[i] and look at the levels themselves, the picture changes shape. Yes, confidence is down from recent highs. But retirees, in particular, remain broadly confident in their ability to live comfortably in retirement despite all the “noise” about inflation, Social Security, and volatile markets. Roughly three-quarters still say they feel secure about their financial footing in retirement. That is not a fragile number. It is a resilient one.

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What stands out even more is how consistently the survey shows a gap between expectations and actual experience. Workers — still on the near side of retirement — are meaningfully less confident than those already in it. That pattern shows up again in the latest Retirement Confidence Survey, and it is one of the most important, if underappreciated, dynamics in the data. And why not? The drumbeat of bad economic news, unrealistic financial expectations, dramatically inflated lump-sum healthcare costs, and yes — lack of confidence — are incessant, even in this “longest-running survey of its kind.”

Considering the headline prisms journalists — and industry surveyors — routinely put in front of people, what else could you expect?

But — and as a current retiree — let me just affirm what the RCS is (still) telling us: retirement looks more uncertain when you are looking at it than when you are living it.

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That asymmetry is not surprising, but it is revealing. Before retirement, the risks are abstract and cumulative — markets, inflation, healthcare costs, longevity. They tend to stack in the imagination. After retirement, those same risks become real, but also more bounded. Income sources are visible. Tradeoffs are immediate. Decisions replace speculation.

The result is often not a dramatic sense of abundance, but something more important: manageability.

That does not mean retirees are carefree, or that pressures like inflation are irrelevant. The modest decline in confidence this year almost certainly reflects real household strain — and what I (still) consider to be a valid concern that lawmakers will fumble the Social Security (and Medicare) foundation. But it is still a decline within a relatively high band —movement from strong confidence to slightly less strong confidence, not from confidence to doubt. A slight dip, not a crash.

Let’s face it — the most overlooked (and certainly unreported) signal in the data: those actually in retirement are still, by and large, saying it works.

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Not perfectly. Not uniformly. But sufficiently — and more consistently than the pre-retiree mindset — or the headlines that fuel it — would suggest.

That gap between perception and experience is not closing. If anything, it remains one of the most durable features of retirement confidence research. And it carries an important implication: the further people are from retirement, the more uncertain it tends to feel. The closer they get — or the more they experience it — the more workable it often becomes.

Unfortunately, that is not a headline story — and it’s never going to get “clicks.” But it may be the real one worth paying attention to. 

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And maybe, just maybe, it’s one YOU should share.

• Nevin E. Adams, JD

 

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[i] Typical headlines included Retirement Confidence Among Workers, Retirees Slips to Lowest Point in Nearly a Decade, Retirement Confidence Falls as Social Security Concerns Mount, Workers' Retirement Confidence Hits 9-Year Low: EBRI, Americans Are Losing Confidence in Having Enough for Retirement, Survey Says - WSJ, Workers’ and retirees’ confidence for a comfortable retirement continues to decline amid fears of changing government programs - Pensions & Investments,

The ‘New’ 401(k) Retirement Savings ‘Problem’

 For years, the retirement industry has been obsessed with one key problem: people aren’t saving enough. Now, “suddenly,” we have another.

Retirees aren’t spending “enough.”

There’s a certain irony in that. After decades of urging discipline, restraint, and delayed gratification, we’re now concerned that retirees are too disciplined — that they’re depriving themselves of the very retirement they spent a lifetime preparing for.

Some of that is clearly a byproduct of the defined contribution system itself. We’ve spent years focusing workers on how much they can accumulate, not how much they can spend. Defined benefit plans answered a very different question: What will I get? Defined contribution plans leave retirees staring at a balance and wondering how long it will last. 

And once the paycheck stops, that question gets very real, very fast.

Because while you can model returns, you can’t model life. Inflation, healthcare costs, longevity—those aren’t just variables, they’re uncertainties. So yes, retirees tend to be cautious. Frankly, it would be surprising if they weren’t.

That hasn’t quieted a growing chorus worrying that retirees are being too cautious— “hoarding” assets out of fear they’ll run out of money before they run out of…life.

Distribution Defaults

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There’s some data behind that concern. The Employee Benefit Research Institute has long documented the extent to which retirees rely on required minimum distributions (RMDs). They don’t withdraw until they have to, and when they do, they tend to take …about what’s required. The RMD doesn’t just trigger withdrawals—it effectively defines them. Like it or not, the IRS life expectancy tables have become the default decumulation strategy.

And then there’s the work of David Blanchett and Michael Finke, which suggests retirees are far more comfortable spending income than they are dipping into savings. Frame it as income, and people spend it. Frame it as an asset, and they preserve it. Hence, the now-popular notion of a “license to spend.”

Now, I get it. As someone now in retirement (though not yet subject to RMDs), I’ve done the math. The 4% rule, the RMD tables, the various projections—all of them, in one way or another, are trying to answer the same question: how do I make this last? And how do I do that not just for me, but for my wife — who, actuarially speaking, is likely to outlive me?

As we approached retirement, we focused on two things: what we were spending (admittedly, figuring out retirement expenses is easier the closer you are to retirement), and what income we could count on. Social Security for both of us (for the moment, anyway), plus a couple of modest partial pensions, gave us something important—not just income, but reliable income. Enough to cover the basics of our chosen lifestyle. And yes, we spend that money just like we spent our pre-retirement paychecks.

What we didn’t do was annuitize the rest of our savings.

Puzzle Pieces

And that’s where some of this current messaging starts to feel …binary. Maybe that’s not the intent, but it’s often how it comes across: if income is good, more must be better—and converting a big chunk (or all) of your savings into an annuity is the logical next step.

And yet, even when the option is available, most still …don’t.

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This is what the academics label the annuity “puzzle” – the continued reluctance of American workers to embrace annuities as a distribution option for their retirement savings. It’s an academic headscratcher because they tend to assume workers are “rational” when it comes to complex financial decisions, specifically because “rational choice theory” suggests that at the onset of retirement, individuals will be drawn to annuities because they provide a steady stream of income and address the risk of outliving their income.

Human beings are, in fact, mostly rational (academics not always so much) – and, despite record annuity sales (outside of retirement plans) most human beings (still) can’t quite get their arms around the notion of handing the biggest sum of money they’ve ever seen over to an insurance company …which will then “dribble” it back to them in considerably smaller sums each month, albeit for the rest of their lives. 

The industry’s current “solution”? If they won’t buy it on their own – and if plan fiduciaries are (still) hesitant to put it on the menu – well, let’s default them into it - by embedding it in a target-date fund or managed account. Now, honestly, if a target-date fund is a “blunt” asset allocation instrument, how is defaulting participants with a myriad of personal financial and physical circumstances, retirement needs, and health concerns any less so?

Look, reliable lifetime income is valuable. In many cases, invaluable. It is the baseline for a successful retirement financial plan. But so is flexibility. So is liquidity. So is the ability to respond to whatever retirement actually throws your way. Things that the limits of “regular” lifetime income won’t address.

So, maybe don’t assume that the only way to give retirees a “license to spend” is to ask them to hand over the keys to the entire portfolio – certainly via a default mechanism they likely never really understood or appreciated.

And if that’s not what’s being suggested—if the intent is really about partial solutions, flexibility, and choice—then perhaps the messaging could use a little more clarity.

Because if I’m hearing it the other way, I’m probably not the only one.

— Nevin E. Adams, JD

Managed Accounts — It’s Not (Just) the Allocation

 Managed accounts have been praised, criticized, and litigated — often on the theory that they’re little more than expensive target-date funds. However, a recent report actually quantifies their impact — and turns out, it’s not an investment story, it’s behavioral.

That report — inauspiciously titled “The 2026 Managed Accounts Research Series: Analyzing the Value of Managed Accounts” — was published in mid-January by Morningstar. Of course, Morningstar has a fair amount of “skin” in the managed account space — a reason, if you will, to find a favorable outcome for the design. 

And, sure enough, the analysis claims that managed accounts outperform target-date funds and the efforts of so-called “do-it-yourself” investors for — well, everyone. More specifically, the report claims that MAs increase the median wealth/salary ratio at age 65 by 5.9% for TDF investors and by 11.4% for DIY investors. Across all plan participants, adopting an MA led to an overall increase of 7.7%. Oh, and it does even better for younger participants, and lower-income individuals.

At this point, my natural cynicism kicked in — though based on my personal and significant experience working with Jack VanDerhei, one of the coauthors, over a period of decades during his long-standing tenure at the Employee Benefit Research Institute (EBRI) — well, let’s just say if Jack says something is “so,” I tend to believe him.

Following the report publication, I had an opportunity to talk with Jack (and Spencer Look, his collaborator in this effort) to better understand their model. For those who haven’t stumbled across the report, they take a significant database of actual 401(k) plan balances and activity and apply sophisticated statistical behavioral modeling techniques to project long-term outcomes based on various assumptions. While it’s not unusual for researchers to deploy statistical modelling, most suffer from a lack of actual data, not only as a baseline, but as a behavioral predictor. Which, I should add, explains (to me, anyway) why the results often don’t match up with how real people respond/react in the real world. 

All that said, this kind of modelling is also dependent on the quality of the underlying assumptions — and here none is perhaps more focused on than cost. Here the assumptions are 40 basis points cost for managed accounts (plus another 31 basis points in fund fees), 30 basis points for target-date funds, and 73 basis points for the DIY group.  Don’t like those assumptions? VanDerhei is willing to plug in different numbers.

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I also questioned whether it makes sense to model “managed accounts” generically, given the wide variation in personalization, design, and cost. Look explained that their review of roughly half a dozen managed account structures — including but not limited to Morningstar’s — showed sufficient similarity to support a generalized model. The same held true for target-date funds.

But here is the part that matters.

As important as factors like cost and asset allocation (not to mention the cost of asset allocation) are to outcomes, the report acknowledges that “…higher contribution rates are the primary driver.” The researchers further note that, “based on our analysis of the empirical data, MA users consistently save more than TDF or DIY investors, even after controlling for age, wage, tenure, and plan design features” — a pattern they say “…suggests that personalized savings-rate recommendations[i] embedded within MAs play a key role in encouraging higher savings rates.” 

While you have to go to page seven of the 19-page report to find that,[ii] to my eyes, it is the most important sentence in it.

Now, I’ve long said that while we talk about “managed accounts” as though they are a monolithic concept, they are not. There are different — in some cases, widely different — levels of personalization deployed — variations in cost and construct. Anyone who ignores these potential underlying differences in application is missing the point. 

I will admit that in considering the value of managed accounts, I had — perhaps as many of you — tended to focus more on the differences in asset allocation that might be possible if we knew more than projected retirement date — not to mention variation in the underlying costs. What I had not factored in was what the Morningstar researchers have — the application of personalization to influence and impact savings rates. 

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If managed accounts meaningfully increase savings rates — not just tweak allocations — that changes the fiduciary conversation entirely.

Because better investing matters. But saving more matters more.

• Nevin E. Adams, JD

 

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[i] It’s worth noting here that the impact is smaller, but still positive, for AE with escalation plans, with TDF investors seeing an increase of 2.7% and DIY investors seeing an increase of 7.8%. Moreover, approximately 92% of AE plans with auto-escalation show an improvement in the median projected retirement wealth for TDF investors under the MA scenario. In other words, while automated increases in salary deferrals help, those timed and personalized via the managed account platforms provide a superior result.

[ii] It IS, however, right there with the first findings. Apparently, the folks who created the executive summary didn’t view it as being as significant as I did.

5 Ways Changing Jobs Puts (Your) Retirement at Risk

  Changing jobs can be a time of great energy and excitement — but if you’re not attentive, it can also undermine your retirement security. Here are five ways it can do so.

Cashing It Out

Probably the biggest job change risk to retirement security is the rollover decision. Generally speaking, most with balances less than $1,000 are automatically issued a check of their savings minus income tax and 10% penalties, those with between $1,000 and $7,000 are given two other options to cashing out: to roll over assets into a qualified IRA or to transfer to a new employer’s plan, while those with balances over $7,000 also have the option to leave their account with that old employer plan.

As you might expect, smaller balances are not only the most likely to be those of lower income individuals, but they also tend to be lower tenured and are more likely to be women. Oh — and if that individual has an outstanding loan? Well, that’s where the real “leakage” occurs. Remembering of course that there will be federal and possibly state/city taxes netted against it, not to mention a 10% penalty for all that are less than 59 ½.

Sizing the impact of this leakage is complicated, but the Employee Benefit Research Institute (EBRI) has estimated that each year approximately 40 percent of terminated participants elect to prematurely cash out 15% of plan assets. For 2015, EBRI estimated that $92.4 billion was lost due to leakages from cashouts.

Putting It in a Money Market ‘Mattress’

Even those who manage to successfully rollover their balance to an individual retirement account (IRA) can lose out on retirement account growth. A 2024 Vanguard analysis notes that 28% of rollover investors stayed in cash for at least 12 months, with minimal changes after the first three months following the contribution.

More than that, the report notes that among rollovers conducted in 2015, 28% remained in cash for at least seven years — and explains that younger investors, women, and those with smaller balances (who, of course, are the same groups that are more prone to cashouts in the first place) are especially prone to staying in cash for years following a rollover.

Which these days is pretty much the same result as sticking in under your mattress.

Leaving It ‘Behind’

In view of the hurdles cited above, it should come as no surprise that some go with the path of least resistance — and for some that means just leaving your account where it is. In fact, there are some recent surveys that suggest that employers are not only fine with that, there is some preference for leaving those balances — particularly larger balances — in the plan where they originated.

That’s just fine — and may even be preferable for any number of reasons — so long as you keep up with it. That said, it’s the kind of thing that’s easy to lose track of — that old employer may change recordkeepers, necessitating a new website/phone number to access your account, changes in investment options that might impact your account, or even — certainly if the balance is small enough — you just forgetting that you still have an account there. All in all, EBRI has estimated that over a 40-year period, those accumulations might add up to $1.5 to $1.99 trillion.[i]

Regardless, leaving one — or multiple — retirement plan accounts with your prior employer(s) may be the easiest thing to do at job change. However, that can make it more difficult to manage your retirement savings — and there have been situations where “forgotten” accounts have fallen prey to online theft, in no small part because they haven’t been accessed in a while, or perhaps not at all following a provider change. Just don’t let “out of sight” become out of mind.

Settling for Savings Rate Resets

Consider a 2024 Vanguard study that found that, despite having an increase in income from a job change, many workers experience a substantial slowdown in savings. The median job switcher saw a 10% increase in pay, but a 0.7 percentage point DECLINE in their retirement saving rate when they switched employers. And while most job switchers (64% of the income sample) experienced a boost to their income, just 44% increased or maintained their saving rate from their prior job.

Most (55%) actually DECREASED their saving rate in their new job. Arguably not because they intended to, but because they simply drifted along with the default savings rate at their new employer. Even when they experienced a pay increase of more than 20%!

Taking a New Job Without a ‘New’ Plan

A new analysis by the Employee Benefit Research Institute (EBRI) finds that when a worker did have a retirement plan at a job, they were more likely to stay at that job compared with workers who did not have a plan. The report notes that, for example, in 1996, 76.8% of retirement plan participants were still at the same job they had had in 1994 compared with just 58.1% of those who were not retirement plan participants.

On the other hand, among workers who changed jobs from 1996–2022, an average of 43.8% moved from a job without a retirement plan to another job without a retirement plan, while an average of 20.9% had a retirement plan at both jobs.

That said, only an average of 15.3% gained a plan upon job change. while an average of 20% lost access to a plan via work.

All that said, perhaps the most encouraging statistic comes from a recent Schwab survey of stock plan participants — and while that might be an unusual subset, according to the survey, 82% of respondents consider a 401(k) plan a must-have benefit when evaluating a new job, surpassing health insurance coverage at 78%.

Because, as we know, access to a retirement plan at work is the very best way to help provide for a financially successful life after work.

In sum, when making a job change, you should:

1. Look for ways to avoid taking a distribution (and incurring the substantial taxes).
2. Look to see if the new employer has a retirement plan — and whether it permits rollovers or not.
3. Make sure your rollover balance is properly invested.
4. Make sure your savings rate in the new plan keeps pace with your previous — and perhaps more if you got an increase.
5. And while you’re at it — it’s a good time to do a retirement readiness check-in to make sure that the plans for retirement are current.

-              Nevin E. Adams, JD

[i] There have been some ridiculous projections as to how much this adds up to. The point is valid — the math, not so much. See The True 'Cost' of 'The True Cost of Forgotten 401(k) Accounts.'