Retirement Realities

 Are you confident about your retirement finances? Apparently, and despite responses that undermine a rational level of confidence, many are.

Last week, the Employee Benefit Research Institute (EBRI) and Greenwald Research unveiled their 34th annual Retirement Confidence Survey (RCS). Now, I’ve commented previously about the dubious conclusions one can draw from personal sentiment surveys, not to mention those personal assessments of wealth and needs.

Those limitations notwithstanding, over the years, the Retirement Confidence Survey has helped uncover a number of interesting and intriguing perspectives about retirement, real and imagined―and no small number of what would appear to be unrealistic expectations about retirement: expectations around how long individuals think they will be able to work, for example, or that they will be able to work for pay after retirement.

Additionally, there have been indications that more individuals expect to receive a pension than would be suggested by the data regarding how many American workers are actually covered by such programs. However disconnected those perspectives seem from reality, their mere acknowledgement provides a valuable opening for discussion.

The RCS is, after all, based on phone interviews with participants and retirees, rather than an objective evaluation of their incomes and actual savings accounts. However, in view of the expressed “need” versus “have” amounts, it’s hard not to wonder how many are confident when they have no reason to be. Indeed, two-thirds (68%) of the workers and three-fourths (74%) of retirees surveyed were very or somewhat confident about having enough money to live comfortably in retirement—unchanged from a year ago (albeit a different group of individuals). And one might feel a bit better about that level of expressed confidence until you get to the datapoint regarding how many had made any attempt to figure out how much they would need, only to discover that (only) half (52%) had.[i]

But if worker pre-retirement confidence (still) seems disconnected from reality, the post-retirement version—from folks actually living IN retirement—remains reassuring. While over half of retirees say their overall expenses in retirement are higher than they originally expected, nearly 4 in 5 say they are able to spend money how they want, within reason.

Moreover, despite those higher-than-expected costs, significantly more retirees this year—3 in 10—say their overall lifestyle in retirement is better than expected[ii]—and more than two-thirds of retirees agree they are having the retirement lifestyle they envisioned—a statement with which a quarter of retirees strongly agree. And while three-quarters of workers expect to work in retirement, just 3 in 10 retirees report they actually do.

As a long-time RCS “watcher” (and, once upon a time, an RCS “voice”), you learn that people’s confidence rises (and falls) with the stock market—though there doesn’t seem to be a direct correlation between those movements and their actual retirement savings. People consistently report that they haven’t made even a single attempt to figure out what their retirement needs will be—and among those who have been “guessing” remains a popular response.[iii] The closer you are to claiming Social Security benefits, the more confident you are in receiving them—even though this year’s RCS notes that fewer than half of workers have reviewed the amount of their Social Security benefits at their planned retirement age, and only 59% have thought about how the age at which they claim Social Security will impact the amount they receive (and, despite their claiming status, just 77% of retirees have).

On the other hand, the mere attempt to figure out retirement needs seems to increase confidence.  Ditto working with an advisor. But the biggest boost in confidence seems to come from having a retirement plan; those reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer were more than twice as likely as those without any of these plans to be at least somewhat confident (77% with a plan vs. 34% without a plan).

All, in all, for those looking to feel more confident about retirement (or looking to help others feel more confident), I’d offer the following suggestions:

• Get access to a retirement plan at work—and participate.
• Take advantage of any number of free retirement-needs calculators to get at least a sense of your likely needs (it probably won’t be as bad as you think).
• If your plan offers access to a retirement plan advisor—use them.

If you do all of those, you’ll not only feel more confident about retirement—odds are that feeling will be supported by reality.

- Nevin E. Adams, JD

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[i] Even more disquieting is the approach taken to do so. Previous versions of the RCS have found “guessing” to be a leading response. This year’s RCS details a number of “thought about” categories which wouldn’t seem to be very substantive preparation.

[ii] Of course, steady followers of things like the RCS may have a developed a disquieting view on what retirement would actually be like.

[iii] In a nice “two-fer,” those reporting that they or their spouse participate in a retirement plan were significantly more likely than those who do not participate in such a plan to have tried a calculation (59% vs. 19%).

The Sure Not-So-Sure Thing

 By some accounts, I just spent the past week in “retirement”—driving around sightseeing, reading some good books, hanging out with family, and yes—even walking on a beach.

And I have to tell you—if that was retirement, I don’t know how I’m going to afford it.

Now, I realize that isn’t the stuff of most “real” retirements, though it is frequently the stuff of retirement planning brochures. My week was a family vacation, and it was spent doing the things that families do on vacations.[i] And it served as a stark reminder that while sitting on a beach doesn’t cost much, making arrangements to stay—and eat—in proximity to the aforementioned beach is a whole other financial consideration.

That said, when those actually in retirement are asked about their retirement confidence—well, it’s pretty high. According to the Employee Benefit Research Institute/Greenwald Associates annual Retirement Confidence Survey, 77% of current retirees report feeling either very (33%) or somewhat confident about having enough money to live comfortably throughout their retirement years. All of which suggests that if there’s a lot of uncertainty about what retirement will be like/cost, once you’re “in it”—well, you both have a sense of what it’s going to cost, and how much you have to cover it.[ii] That, by the way, despite the reality that the same RCS has for years found that significant numbers of individuals have found themselves in retirement through no choice of their own[iii]—sometimes due to health, sometimes due to employment-related decisions. 

Today we are looking at an unusual confluence of events: a tight job market in the middle of what has been termed the “Great Resignation,” surging inflation at rates not seen in a generation, and investment markets that, after a remarkable run-up—well, let’s just say it’s been rough on most 401(k) accounts. We’re getting the same kinds of investment advice we always do/give during such downturns—but one can’t help but wonder if it’s “different” this time—if the disruptions are anything but “transitory.”

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, or deal with the financial consequences of an unexpected medical emergency (or that of a loved one). That this happens at the same time that your investment portfolio is taking a sustained “hit” contributes to the sense of economic pessimism that garners so much press, polling and political aspirant attention in this election season. Without question, things cost more than they did (when you can find them on the store shelf), and those on fixed incomes (and that includes a growing number of current workers who perhaps haven’t gotten a pay increase in a while) have to make “adjustments”—often painful ones. And if all of this doesn’t warrant changes in financial plans, it certainly warrants a new level of discussion about them.  

Perhaps the only “sure” things are death and taxes after all—but the lesson for those of us still drawing a paycheck and planning for retirement is the importance of preparing for that third “sure” thing when it comes to retirement planning: uncertainty.

- Nevin E. Adams, JD

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[i] In fairness, we also spend a day tracking down the gravesites of some ancestors, and that probably isn’t on most vacation agendas!

[ii] It’s worth highlighting, of course, that workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are twice as likely as those without any of these plans to be at least somewhat confident (83% with a plan vs. 40% without one). 

[iii] In the 2022 RCS, 32% who retired earlier than planned say they did so because of a hardship, such as a health problem or disability, not related to COVID-19. Another 23% say that they retired due to changes at their company, but 38% say they could afford to retire earlier.

The 'End' in Mind

I was discussing the subject of retirement over the long holiday weekend with family. 

There was a lot of talk about Social Security (or the looming lack thereof), the impact(s) of inflation, and how the markets (stock and housing) had boosted prospects, but ultimately decided we weren’t sure when that would happen, we weren’t even positive that it would happen (the so-called “great resignation” notwithstanding), or if it might consist of a gradual slowdown/pullback. Moreover, we really didn’t know what “it” would be like if and when it did happen, or where we might be living even if and when. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines and Zoom meetings. Ah, now that’s something to look forward to!

However, and as those who are already ensconced there can attest, retirement has its own set of pressures, and they go well beyond bucket list “bingo.” But the “difficulty” that my family discussion had in actually describing what we would “do” is a real problem in retirement planning. After all, if you don’t know what you are going to “do” (or from where you will be doing it), it’s really hard to develop a plan, certainly not an effective one. Let’s face it, the things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag—and sometimes a specific deadline.

Now, of course, retirement—more precisely, living in retirement—also has a price tag, if not a specific deadline (though the latter can certainly influence the former). Anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number, or at least a range of numbers. Unfortunately, those disembodied figures don’t shed much light on defining what we’ll get for our money—and even then they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?” (or perhaps a higher assumed return).

The sad reality is that too few take the time to make that calculation before making that decision. In fact, according to the Employee Benefit Research Institute/Greenwald & Associates’ 2020 Retirement Confidence Survey, just over 4 in 10 (44%) have (ever) estimated[i] how much income they and your spouses would need each month in retirement—a pretty consistent finding from the RCS, which began asking that question way back in 1993. 

Doubtless some of the reluctance is the sheer complexity of the “ask” (not to mention the variables), the press of more immediate concerns, perhaps even a fear of what the answer will be. For years now, a number of providers have produced an estimate of how much monthly income one’s current account would yield on participant statements, a feature (somewhat) codified in the SECURE Act. That said, and with its many assumptive flaws, I’ve never found that focus particularly useful, though it’s an improvement over the traditional lump sum “need” that most calculators provide, and certainly better than a mere account balance. Personally, I think we’d do a better job of paying that retirement “bill” if participants set an annual target—a budget for retirement, just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger, often apparently unassailable goal. Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care costs, groceries, and filling the tank cost more than we had planned, we not only don’t pay that retirement “bill,” we don’t even see it as overdue. 

Retirement planning needs to start with the “end” in mind, of course—but to be effective it also needs a constructive road map to help chart the way there. 

- Nevin E. Adams, JD

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[i] Worse—and this data point was not in the 2020 RCS—when you ask how people had made some kind of assessment of their retirement income needs, a jaw-droppingly large percentage indicated they… guessed.

The Chicken or the Egg?

It is a question that has puzzled philosophers and scientists for centuries: which came first – the chicken or the egg? Similarly, an updated version of a classic survey of retirement confidence finds some interesting attributes among those who are more confident about their prospects – but are those attributes a result of that confidence, or is it the confidence that preceded them?

The 28th annual Retirement Confidence Survey (RCS) from the non-partisan Employee Benefit Research Institute (EBRI) and Greenwald Associates found that Americans are feeling a bit better about their retirement prospects.
However, the RCS also found – as it has in previous years – that certain factors are tied to higher confidence, specifically if they have access to a defined contribution plan, are relatively free from debt, are already retired – or, in a new finding from this year’s RCS – that they are healthy.

Now, the connection between access to a retirement plan and savings is well established. An updated analysis by EBRI finds that even those with modest incomes – those making between $30,000 and $50,000 – are nonetheless a dozen times more likely to save if they have access to a retirement plan at work.

More intuitive is the negative impact that debt, particularly heavy debt, can have on retirement savings, not to mention the impact on confidence about that savings, or more precisely, the lack thereof.

As for the new finding in this year’s RCS, 6 in 10 workers who are confident about their retirement prospects say they are in excellent or good health. As for those who are not confident about retirement, only 28% report such good health. The same is true for retirees: 46% of confident retirees are in good health, compared to just 14% who are not confident. What’s less clear is whether they are confident because they are healthy, or healthy because they are confident (or have a reason to be).

In fact, those of us still looking ahead to retirement can draw some comfort that those in retirement are – and have consistently been – more confident about retirement. Indeed, in this year’s RCS, a full three-quarters of retirees are very or somewhat confident they will have enough money for retirement – and that’s as high as that metric has been going all the way back to 1994 (except for last year, when 79% were that confident).

Of course, retirees were also more than twice as likely (39% versus 19%) as workers to have tried to calculate how much money they would need to cover health care costs in retirement – and those who had were less likely to have experienced higher-than-expected health costs and are more likely to say that costs are in line with their expectations.

Ultimately, there’s nothing like actually living in retirement to provide a solid sense of what it costs to live in retirement. When it comes to retirement confidence, it may not always be obvious as to whether the chicken or the (nest) egg came first.

But it seems to me that a "bird" in the hand is nearly always worth two in the bush…

Preparing for the Storm

If you live (or were travelling to) the upper east coast of the U.S. this week, odds are you spent some time making preparations for what looked to be (and by the time you read this likely is) a big winter storm.

We don’t always get that much time to prepare, of course – and sometimes when we do, those big storms don’t turn out to be very big after all. But you can generally count on lots of frenzied weather forecasters predicting snow-mageddon (even if they do offer some caveats), and at least one shot of the inside of a local grocery showing empty bread and milk aisles. Because, after all, who could go 48 hours without bread and milk?

Life is full of surprises – and though most of those are unaccompanied by a friendly meteorologist to help us anticipate them, one might well wonder why we let them “sneak” up on us without making better preparations.

Perhaps the most obvious is the topic of retirement preparation. Any day now the queen mother of retirement confidence assessments – the Employee Benefit Research Institute’s Retirement Confidence Survey (RCS) – will likely, as it has for more than a quarter-century now, tell us that Americans are, writ large, uncomfortable, uncertain, and unprepared for retirement. Nor is this some external assessment based on an objective evaluation of retirement preparations and needs. Rather, this survey, as are most of the industry survey progeny it has since inspired, is a self-reflection by survey respondents. Respondents including some who do not save, and others who do not save “enough,” and many, probably most, who haven’t even tried to guess at how much “enough” might be. Most will likely be concerned about their prospects for a financially secure retirement – but apparently not concerned enough to do very much about it.

Indeed, if history is a fair guide, I think it’s fair to say that the media coverage will likely rival that of an impending environmental apocalypse. Despite the researchers best efforts to provide some perspective on the findings, you can almost certainly count on an obsession as to how many haven’t yet accumulated $1,000 in savings – albeit without regard to their age, their income, or whether they have the encouragement and incentives of a retirement plan at work. If the report finds a drop in confidence, it will almost certainly be cited as a lack of confidence in a system that isn’t working. If, on the other hand, the report finds a surge in confidence – well, then you can expect reports that talk about how unfounded the confidence is.

As complicated as weather forecasting can be, it pales in comparison to trying to figure out what the financial “weather” for the next 30 years is going to be. Little wonder that those already in retirement tend to be more confident than those with decades of preparation still ahead. Still, what all too often gets lost in our criticisms of the current system is just how well it works.

Perhaps only three-of-four eligible to participate in such programs choose to do so, but on an employer-by-employer basis, participation rates north of 90% are not impossible to find – and that’s before the adoption of mechanisms like automatic enrollment, where those kinds of rates are common. Target-date funds have, in incredibly short order, gained the favor of plan sponsors and participants alike – with as yet incalculable benefits for those retirement investments. Those, and a whole new generation of retirement income alternatives are coming to market – alternatives that, unlike the prior generation, will benefit from the scrutiny of plan fiduciaries trying to make sure that a lifetime of accumulation isn’t decimated in a single moment. These innovations have come to light, and to market, because of the employer-sponsored system. By comparison, what kinds of innovations have been brought to those disciplined enough to set aside money in a retail IRA?

In the real world, a lucky few know how to save and invest properly; somewhat more have access to the counsel and advice of a trusted adviser. But for most of us, the workplace retirement program is our first and only “investment” account. It is the one place where even those with relatively small balances can have access to professional advice, alongside the opportunity to gain the purchasing power of a group.

None of which would be possible without the involvement of their employer, the funding of that company match, and the tax incentives that underpin a structure that gets workers of modest means to do what never seems to come naturally to human beings – to prepare for the storm before it’s upon us.

For those of you in the path of this storm, stay safe – and I look forward to seeing hundreds of you in Las Vegas at the 16th Annual NAPA 401(k) Summit!

- Nevin E. Adams, JD

this post originally appeared here.

6 Assumptions That Can Wreck a Retirement

The future is an uncertain thing, and planning for uncertainty inevitably involves making some assumptions.

Here are six that, done improperly, can wreck your retirement.

How Long You’ll Live

The good news we are living longer – but that means that retirements can last longer, and medical costs can run higher. But while we’re living longer, studies indicate that we tend to underestimate how much longer we will live.

The Social Security Administration notes that a man reaching age 65 today can expect to live, on average, until age 84.3, a woman turning age 65 today can expect to live, on average, until age 86.6.

But those are just averages. About one out of every four 65-year-olds today will live past age 90, and 1 out of 10 will live past age 95.

How Long You’ll Work

Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will surely boost your projected outcomes (it both gives you more time to save, and reduces the time that you will be drawing down those savings), it may not be realistic for many individuals.
Indeed, the 2016 Retirement Confidence Survey from the nonpartisan Employee Benefit Research Institute (EBRI) notes that the age at which workers expect to retire has been slowly rising. In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, that number had more than tripled; 37% of workers now report that they expect to retire after age 65, and 6% say they don’t plan to retire at all. At the same time, the percentage of workers who say they expect to retire before age 65 has dropped by half, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

How Fast You’ll Withdraw

For years, financial planners had touted the 4% “rule,” a rule of thumb for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. There’s no real magic to the 4% rule, of course – it’s just the math that allows for a systematic withdrawal of funds roughly timed to coincide with the expected lifespan of the individual. Portfolio returns can impact this, of course, so much so that that factor, coupled with the increased longevity, has these days led some to call instead for a 3% rule.

But whatever formula you use, it’s important to remember that while a low rate of withdrawals might help preserve your portfolio, it might not produce a very comfortable living.

How Much You’ll Earn on What You Save

Let’s face it – if you could predict future market returns, you probably wouldn’t have to be worrying about retirement. But as we all know – and have seen proven time and again over the past couple of decades, markets frequently defy even the expectations of experts.

There are bad investments that can cost you money, and good investments that can help your account grow faster.

So, what should a non-expert assume? It’s generally best to be conservative – one of the biggest mistakes individuals make is assuming outsized returns on their savings. But make sure that assumption is consistent with how your savings is invested. For example, if you have all your savings invested in a money market fund, it’s highly unlikely (some would say impossible in the current environment) for you to actually get an 8% return.

How Much More Things Will Cost

Twenty or 30 years from now, prices are likely to change, and for many, those prices will increase. Consider that, overall, the average inflation rate for 2016 was 1.3%. In 2015, inflation climbed 0.7% with an average running pace of 0.1%, with gasoline prices plunging that year. It’s not that all prices will always go up – but they often do, and might increase faster than your income.

There’s a calculator that you might find interesting at http://www.usinflationcalculator.com/.

How Much Differently You’ll Spend

This has two components. Some costs (notably medical) frequently increase in retirement, particularly with the longevity trends noted above. Others – such as commuting costs, and even the “cost” of saving – decrease.

But think – 10 years ago would a “fit bit” have even been on your radar, much less your arm? New products and services continue to emerge – some will make your retirement budget more manageable – others may well strain it.

With all the uncertainty and variables to consider – there is one key assumption about retirement saving that you can, to some extent, control – and that’s “How Much You’ll Save.” Because what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any), and some help in making solid, reality-based assumptions.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at choosetosave.org. Even better, if you don’t know what you’re doing, get help – and if there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD

5 Reasons to Plan and Save for Retirement Now

As April is National Financial Literacy month, and this is National Retirement Planning Week, those who work with retirement plan participants know it’s important to do the right thing(s) when it comes to retirement planning and savings.

But for those you are trying to help encourage, here are five reasons to plan and save for retirement now, and as an integral part of that financial plan.

Because you don’t want to work forever.

Seriously, no matter how much you love your job, if you want to stop working one day – and trust me, you will – 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, for many, perhaps most, they do. On the other hand, there are changes in how we spend in retirement as well – and they aren’t always less. A recent report by the nonpartisan Employee Benefit Research Institute (EBRI) 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% of the budget for those between 50–64, but increase to about 20% for those age 85 and over,” EBRI notes. 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.

In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey. At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

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

People are living longer, and the longer your life, the longer your potential retirement, especially if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% 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.

As recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate – even a single time – how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

Whether or not you feel fully financially “literate” now, you need to have a plan for your retirement. And there’s no time like the present to start.

- Nevin E. Adams, JD

5 Ways to Boost Retirement Confidence

With increasing regularity, the financial services industry pumps out surveys that purport to capture America’s sense of confidence regarding its readiness for retirement, at least on a financial footing. Mostly, however, they seem to focus on the symptom, rather than dealing with the underlying cause(s).

However well-intentioned, these all seem designed to highlight a persistent strong undercurrent of concern — one that, certainly when juxtaposed against the generally disappointing preparation levels reported by respondents, seems completely warranted.

Confidence about retirement is one thing, of course, and preparation something else, though the two are logically intertwined. That said, for those looking to shore up confidence levels, data from the granddaddy of such surveys — the non-partisan Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey — provides a roadmap:

Work for an employer that offers a retirement plan.

Data indicates that workers — even workers of modest means — are 15 times more likely to save for retirement if they have access to a retirement plan at work than those who don’t have that option. It is perhaps not surprising then that in recent years, the RCS has tracked a huge gap in confidence about retirement between those who have a retirement plan and those who don’t; in the 2015 RCS, 44% of workers without a retirement plan are not at all confident about having enough money for a comfortable retirement, compared with only 14% of those who have a plan.

Furthermore, among those with a plan, the percentage of those who are very confident increased from 14% in 2013 to 28% in 2015. In contrast, the percentage of those who are very confident remained statistically unchanged among those without a plan (10% in 2013, 9% in 2014 and 12% in 2015).
Workers reporting that they or their spouses have money in a defined contribution plan or IRA or have a defined benefit plan from a current or previous employer were more than twice as likely as those without any of these plans to be very confident (24% with a plan vs. 9% without a plan in the 2014 RCS).

Figure out how much you’ll need.

The RCS has found that workers reporting that they or their spouses have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance their retirement.

And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, as recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement.

Talk with an advisor.

Anecdotally, when you ask someone about their interest in engaging the services of an advisor, they are likely to tell you that they will wait until they need one — by which most seem to mean that, once they have accumulated enough savings to make it “worthwhile,” they’ll consider getting some help. What’s often overlooked is the role that a financial advisor — particularly one whose expense is covered by an employer plan — can play in helping make that account growth a reality.

In the 2015 RCS, more than three-quarters (78%) of respondents who had talked with a professional financial advisor about retirement planning were either somewhat or very confident that they will have enough money to live comfortably throughout their retirement years, far more than the 49% who did not use an advisor. The 2013 RCS found that nearly two-thirds (65%) of those who used either online calculators or asked the advice of financial advisors were either somewhat confident or very confident that they will have enough money to live comfortably through their retirement years.

On the other hand, nearly half (44.6%) of those who simply guessed were also somewhat confident or very confident.

It seems that, as noted above, the calculation/determination itself has a positive impact, though the kind predicated on real assessment clearly does more for confidence (and probably for the actual basis of that confidence as well).

Retire.

One might expect that the financial realities of being in retirement might well shatter the fragile levels of confidence expressed ahead of crossing that threshold — and yet the RCS has consistently chronicled that retirement confidence is higher among those already in retirement than among those still working. In the 2015 RCS, 37% of retirees were very confident about having enough money to live comfortably throughout their retirement years (up from 28% in 2014 and 18% in 2013), and a third were somewhat confident.

This is despite a consistent finding that individuals are frequently forced to leave the workforce earlier than planned, and that they are less likely to work in retirement than pre-retirees anticipated (in the 2015 RCS, 67% of current workers plan to work for pay in retirement, compared with just 23% of retirees who report they have actually worked for pay in retirement. In the 2015 RCS, 37% of retirees were very confident about their prospects, up from 27% in 2014 and 18% as recently as 2013.

However, as one might expect, workers who are not confident about their financial security in retirement plan to retire later, on average, than those who express confidence.

Save for retirement.

Retirement confidence, like confidence generally, is a state of mind, and one not always grounded in an accurate assessment of reality. As noted above, the mere act of guessing about retirement needs seems to be enough to provide a boost in confidence, certainly in the short run.

Regardless, it’s hard to deny that the best, most secure, means of assuring retirement confidence is establishing a solid foundation for that belief by:

• taking advantage of the opportunity to save and having the discipline to do so;
• establishing a goal and revisiting that goal on a regular basis; and
• enlisting the help of professionals in establishing those goals and in making sound, diversified investments.

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

- Nevin E. Adams, JD

4 Things That Make Me Go ‘Huh?’

Ours is a business where surveys and trends often shape not only perceptions, but policy — though sometimes the conclusions drawn, and even the premise itself — make me go “huh?”

Here’s a sampling:

Citing a drop in deferral rates as a failure of automatic enrollment.

Every so often a personal finance writer will stumble across an industry survey that shows that the average deferral rate in 401(k) plans has declined, a problem they attribute to automatic enrollment adoption. We all know what is going on here; individuals who take the time to fill out a form and enroll in the plan manually tend to defer at a higher rate than do those who are automatically enrolled, the latter typically at a modest 3% rate. On the other hand, automatic enrollment has a dramatic impact on raising the participation rate. The rest is just math — more people, saving at lower rates = a lower average deferral rate.

Now, those individuals automatically enrolled at a 3% rate may draw down the average deferral rate of a plan, or the industry, but it’s almost certainly true that most people who are now saving 3% without automatic enrollment would likely have been saving — nothing at all.

Equating retirement confidence with retirement readiness.

Seems as though every other month we get yet another take on how Americans feel about their retirement prospects — and it’s never very reassuring. The Retirement Confidence Survey conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates has been chronicling that sentiment for a quarter century and over that span of time has tracked movements in confidence that mostly seem to mirror the markets, rather than any real cognizance of retirement preparations. Indeed, the RCS has routinely found that fewer than half of the survey respondents have made even a single attempt — including guessing — to ascertain their retirement needs.

It’s not that confidence about one’s retirement prospects isn’t a relevant consideration — but we shouldn’t equate an uninformed sense of that status with reality.

Comparisons of DB versus DC investment returns.

If ever there was an apples-and-oranges undertaking, it’s the comparison of defined benefit and defined contribution plan returns. The former is, of course, the return of a portfolio representing a single overriding investment philosophy designed to achieve a specific aggregate objective, and one overseen by a plan fiduciary (or plan fiduciary committee). The latter is little more than an aggregation of individually managed (or more frequently unmanaged) portfolios.

And yet, every so often someone wants to offer a comparison of the returns between the two as some kind of evaluation as to which is “better.”

In many of these comparisons, defined benefit portfolios have fared “better,” and the underlying explanation (implicit or explicit) for that differential has tended to be diversification (or “better” diversification), and in more recent years, lower fees have been credited. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

Now, I’m not saying that all, or even most, of those individually directed DC plan allocations are as well designed or maintained as those put in place by a DB investment committee, and however well negotiated it is, it’s hard to imagine that a DC plan with all its inherent complexities could (or should) get as good a deal on price as a DB offering. In fact, unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes.

You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey, how much fuel you have — and how many people you have to transport.

Using average 401(k) balances as a proxy for retirement security.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. Frequently it is based only on the accumulations that have occurred during their tenure at an individual employer, and often only the balance that is found on the single recordkeeping system that is publishing the result. But in preparing this number, those widely varied circumstances are all slopped together to create — mush.

Worse than mush, actually. Because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and generally without the caveats about what it is an average of) in the press.

I’ll allow that some of the permutations of this calculation — such as when we see that average broken down by age demographic — can be instructive as to longer-term trends, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com.

As with everything else on my “huh?” list, it’s mathematically accurate — and nearly completely useless.

- Nevin E. Adams, JD

On Retirement Plans and Plans for Retirement

When is a plan not a plan? When you have a retirement plan at work, apparently.

The good news is that the 2015 Retirement Confidence Survey shows a strengthening of retirement confidence — at least among those who had some kind of retirement plan (DB, DC or IRA). Indeed, among that group, the number saying they were very confident has doubled since 2013.

The bad news? Well, there doesn’t seem to be much in terms of substantive savings accumulations¹ or planning behaviors to account for this uptick in confidence.

Consider that fewer than half (48%) of workers report they and/or their spouse have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement. 

On the other hand, workers reporting that they or their spouse have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance retirement. And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, after a quarter century reading and studying the RCS, several things are clear:

Those who have made the effort² — even a feeble one — to figure out how much they need in retirement are more confident, and likely better off in the long run, since they tend to set higher savings goals.

Those who work with an advisor are more confident, and likely better off in the long run, since they also tend to set more realistic (i.e., higher) savings goals.

And perhaps most importantly, those who have access to a retirement plan are not only more confident, they are probably better off, since they tend to have actual sources of income on which to draw in retirement.

But ultimately, while having a retirement plan may provide some quantifiable increase in confidence about retirement, it’s having a plan for retirement — and acting on it — that grounds that confidence in reality.

Nevin E. Adams, JD

Footnotes

1. While much will likely be made of the relatively low/modest savings amounts reported by RCS respondents, without knowing individual factors like age or income, it’s impossible to discern whether those amounts are woefully inadequate, or reasonable. 

2. Those plans for retirement need to be reconsidered on a regular basis, since many are forced (or choose) to leave the workforce earlier than planned.

"Working" Capital

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or — as often as not these days — to work longer and save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

It should probably come as no surprise that American workers are expecting to work longer. The Retirement Confidence Survey notes that in 1991, just 11% of workers expected to retire after age 65. This year that was up to 33% of workers, and another 10% who said they don’t plan to retire at all.

However, the timing of the retirement decision is often not within an individual’s control. A recent survey conducted by Merrill Lynch and Age Wave found that a majority of retirees surveyed (55%) say they retired earlier than they had expected — just 7% later than they expected. Similar trends were found in EBRI’s 2014 Retirement Confidence Survey (RCS), where while more than one-in-five (22%) of workers say they plan to wait at least until age 70 to retire, only 9% of current retirees actually did so. In fact, going back to 1991, the RCS has found that the median (midpoint) age at which retirees report they retired has remained at age 62 throughout this time.

In fact, the RCS has consistently found not only that a large percentage of retirees leave the work force earlier than planned (49% in 2014), but that many retirees who retired earlier than planned cite negative reasons for leaving the work force when they did, including:

• health problems or disability (61%);

• changes at their company (such as downsizing or closure (18%); or 

• having to care for a spouse or another family member (18%). 

The Merrill Lynch/Age Wave survey cautions that while early retirement used to be equated with financial success, today’s retirees say that health problems are now the top reason for their early retirement (37%). In fact, the surveys indicate that the issues that seem to be triggering earlier-than-expected retirements not only serve to cut short working (and savings) careers, but bring with them additional expense.

Retirement planning requires a lot of assumptions — things like how much we’ll need to live, the return(s) on our investments, how long we’ll live in retirement, and when that retirement will begin.

However, the data also suggest that the assumption that we’ll be able to work to — much less through — the traditional retirement age of 65 may be one of the more optimistic.

- Nevin E. Adams, JD

Look-Back "Provisions"

My wife and I recently celebrated our wedding anniversary.  It was a special day, as they all are, but as I thought back on the events of our life together, I was struck by the realization that I have now been married for about half my life.  Not that I didn’t expect to remain married, or to live this long; if someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes.  However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing, or what my income would be (or need to be)—well, my responses would likely have been much less certain.

In just a few weeks we’ll be making preparations to launch the 2015 Retirement Confidence Survey (RCS)[i].  It is, by far, the longest-running survey of its kind in the nation.  Indeed, this will be its 25^th year.  Think for a moment about where you were a quarter century ago, what (or if) you thought about retirement, what preparations you had made… then consider for a moment what you have done in the years since.  Are you where you thought you would be?  Are you more – or less – confident about your prospects for a financially secure retirement?  Have you planned toward a specific retirement date or age?  Has that changed over the years – how, and why?

Through the prism of that near-quarter-century window, the RCS provides a unique perspective to view in the here and now, and to look back over time on how American workers – and retirees – have viewed their preparations, readiness, and confidence about retirement.  It has also provided those who are working to help improve and/or ensure those prospects insights into those collective preparations, or lack thereof. Moreover, the RCS has offered the ability to gauge potential responses to specific regulatory, administrative and legislative alternatives, both real and envisioned – a critical real-world filter to balance the theoretical world in which academics often imagine we live and respond, or as they often assume, won’t respond[ii].

Retirement confidence is, of course, a state of mind at a point in time, unique to individual situations, and as past waves of the RCS have shown, it’s not always based on a realistic assessment of where you are or what lies ahead.  That said, the RCS offers more than a sentiment snapshot, and those who look not only to feel better about retirement but to have a basis for that feeling need look back no further than the pages of that report.

The RCS has outlined the impact that real-world actions can have on confidence: having saved for retirement, having sought professional investment advice, having made a determination as to how much is needed for retirement, and – as last year’s RCS findings emphasized — having some kind of retirement savings account.  Little wonder that those who have undertaken those steps are more confident of the outcomes.

It’s one thing to anticipate that eventual cessation of paid employment, and something else altogether to make the preparations – to choose to save – and to be confident that you’ll be able to look back with satisfaction one day knowing that you have the financial resources to enjoy it.

• Nevin E.  Adams, JD

Your organization can be part of the 25^th Retirement Confidence Survey.  Survey underwriters serve as a member of the survey’s Advisory Board, along with the opportunity to participate in the review and update of the 2014 questionnaire; have the opportunity to participate in a pre-release, underwriters’ briefing on the results of the survey; are able to utilize the survey materials and findings for your research, marketing, communications, and product-development purposes – and you’ll be acknowledged as an underwriter of this, the 25^th Retirement Confidence Survey, among other benefits.  For more information, contact us at nadams@ebri.org.

[i] More information about the Retirement Confidence Survey is available online here.

Work "Forces"

A couple of years ago, my wife and I sat down with an advisor to revisit our financial plan.  Having gathered all the requisite information regarding assets, debt, insurance, and retirement savings, he turned to me and asked how long I planned to work.

Being in a profession that I not only enjoy, but one relatively unbounded by physical constraints; having some appreciation for the various financial trade-offs associated with the decision to retire, yet desirous of the ability to have more leisure time with my family—conscious of the fact that I have made a career studying and writing about such decisions—I paused to reflect….

And then my wife, with a smile on her face, laughed and said, “Oh, he’s going to work forever!”

Well, that wasn’t the answer I had in mind, but apparently I’m not the only one rethinking retirement.  In 1991, just 11 percent of workers expected to retire after age 65, according to the Retirement Confidence Survey (RCS)[i]. Twenty-three years later, in 2014, 33 percent of workers report that they expect to retire after age 65, and 10 percent don’t plan to retire at all. At the same time, the percentage of workers expecting to retire before age 65 has decreased, from 50 percent in 1991 to 27 percent.  Those expectations notwithstanding, the median (midpoint) age at which workers expect to retire has remained stable at 65 for most of the 24-year history of the RCS.

Moreover, a recent EBRI Notes article[ii] confirms that the labor-force participation rate for those ages 55 and older rose throughout the 1990s and into the 2000s when it began to level off, but with a small increase following the 2007-2008 economic downturn.  While for those ages 55-64 the upward trend was driven almost exclusively by the increased labor-force participation of women, among those age 65 or older, the rate increased for both males and females over that period.

The report notes, however, that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s, but as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased – suggesting either that older workers filled the void left by younger workers’ lower participation, or that the higher representation in the workforce by older workers served to limit the opportunities for younger workers, either directly or perhaps by discouraging them from pursuing employment.

As the EBRI report notes, this upward trend in labor-force participation by older workers is perhaps related to workers’ desire for continued access to employment-based health insurance, to provide some additional years of employment to accumulate savings and/or pay down debt, or maybe even simply because they want to work.

Whatever their motivation(s), these trends highlight a number of key concerns for employers and policy makers: Will workers who want—or need—to increase their financial resources by working longer be able to find jobs?  How might workforce management (and health care costs) be affected by those decisions?  What could delayed workforce entry mean to the retirement savings accumulations of younger workers?

Ultimately, of course, and as the trends tracked and analyzed by EBRI have long indicated, the road through retirement is often influenced by the paths we take to retirement—and when, how, and if we are able to make the transition.

• Nevin E. Adams, JD

[i] See “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans.”

[ii] The April EBRI Notes article, “Labor-force Participation Rates of the Population Ages 55 and Older, 2013,” is available online here.

Needs "Assessments"

My eating habits have always tended toward what my mother politely calls “finicky.” Oh, she tried repeatedly over the years to broaden my horizons but without much success. My wife has similarly tried to expand and improve my dietary choices over the years, but even with the admonition of needing to set a good example for my kids, (my) old habits die hard. In exasperation, she’ll frequently say, “Have you ever even tried _____?”

One of the more surprising findings from the 2014 Retirement Confidence Survey was that fewer than half of respondents indicate they (or their spouse) have EVER tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

What’s even more surprising, of course, is that that percentage has held fairly consistent for the past decade, “peaking” at 53 percent in 2000, before slipping to 38 percent in 2002.[1] It’s recovered since, of course, but still—in this day and age, with so many free and easy-to-access tools available, despite the pressures of daily life and finances, it’s hard to imagine that so many have still not even bothered to make a single attempt to do so.

As you might expect, some are more likely to do a retirement savings needs calculation than others. Married workers are more likely to have done so than singles, and the likelihood of doing the calculation increases with household income, education, and financial assets. Moreover, workers reporting that they, or their spouse, have an IRA, defined contribution, or defined benefit retirement plan are more than twice as likely as those who do not have these to have done a calculation (56 percent vs. 25 percent).

There do appear to be benefits—both emotional and tangible—to doing a retirement needs calculation. Consistent with prior RCS findings, despite having set higher savings goals,[2] workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (25 percent vs. 13 percent who have not done a calculation in this year’s survey). In fact, a previous EBRI analysis found that those using an online calculator appeared to set more adequate savings targets, as measured by the probability of not running short of money in retirement.[3]

So, why haven’t more done a retirement needs calculation? Perhaps they’re nervous about the time and energy it might take to do one; maybe they’re worried they don’t know enough to do the calculation; it might even be, particularly if they’ve made no preparations for retirement, that they are afraid to find out the answer.

Whatever their rationale, a great place to start figuring out what they -or you- will need is the BallparkE$timate,^® available online at www.choosetosave.org[4]

It’ll be good for you—will likely improve your retirement prospects—and you might even enjoy it.

Nevin E. Adams, JD

More information from the 2014 Retirement Confidence Survey, the longest-running survey of its kind in the nation, is available in the March 2014 EBRI Issue Brief, “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans,” online here.

[1] Even among those who have made an attempt, the methods of calculation reported have been quite “varied”—according to the 2013 Retirement Confidence Survey, workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic retirement needs calculation. Eighteen percent each indicated they did their own estimate or asked a financial advisor, while 8 percent each used an online calculator or read or heard how much was needed.

[2] Workers who have done a retirement savings needs calculation tend to report higher savings goals than workers who have not done the calculation. In this year’s RCS, 29 percent of workers who have done a calculation, compared with 15 percent of those who have not, estimate they need to accumulate at least $1 million for retirement. At the other extreme, 17 percent of those who have done a calculation, compared with 37 percent who have not, think they need to save less than $250,000 for retirement.

[3] See “A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey,” online here.

[4] Organizations interested in building/reinforcing a workplace savings campaign can find a variety of free resources at www.choosetosave.org, 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, ASEC. The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.