(from Robert Powell’s Marketwatch column dated 3/22/2016. Click here for the original post. Robert is the editor of Retirement Weekly, a MarketWatch premium newsletter. You can follow Robert on Twitter @RJPIII.)
Most American workers think they need to save a big—perhaps unmanageable—chunk of their income to live comfortably in retirement. They may be right.
But waiting until they are older to save more money won’t save their retirement.
These are among the findings of the 2016 Retirement Confidence Survey released today by the Employee Benefit Research Institute (EBRI) and Greenwald and Associates.
On the positive side, workers who have some kind of retirement account—an IRA, a 401(k), or a defined- benefit plan—are more than twice as likely as those without any of these plans to be very confident they can retire in some comfort.
However, there remains a huge gap between the amount of money Americans are saving for retirement and the amount they say they should be saving.
According to the survey, 38% of workers think they need to save less than 20% of their income, but 17% say they need to save between 20 and 29% of their income and another 22% indicate they need to save 30% or more.
And 22% say they do not know how much they should be saving, according to this 26th annual survey, the longest running of its kind.
Currently, the nation’s personal savings rate is 5.2% according to the Federal Reserve Bank of St. Louis. The average contribution rate for workers contributing to a defined-contribution plan at work is about 7%.
Many American workers who say they aren’t saving enough to fund a comfortable retirement plan to make up for this gap in the most unrealistic of ways, according to Jack VanDerhei, research director of EBRI and co-author of the survey.
Save more later?
In response to the survey question, “What do you think the impact will be of currently saving less than you need for retirement?,” 20% said they would have to save more later; 18% say they will have less to live on in retirement; 15% say they will need to work in retirement; and 14% say they will need to retire later.
In essence, more than one in four workers say they are going to avoid the pain of saving what they should today in hopes they’ll be able to deal with it later on.
And that, says VanDerhei, is a gamble.
Why so? In 2016, 46% of current retirees retired unexpectedly. They left the workforce earlier than planned for one reason or another: health problems or disability, changes at their company (downsizing or closure), having to care for a spouse or another family, and the like. Just 44% retired about when they had planned to, and only 4% retired later than planned.
“I think this is just a horrendously risky gamble on the part of these people who realize that they’re not saving enough today but they’re just going to take their chances that they can keep working long enough to save themselves into some kind of adequate retirement income,” said VanDerhei.
To be sure, some of the folks who say they will save more later will actually be able to do so.
Some, for instance, are young workers who, after paying down their college loans, will likely be able to save more for retirement later, said VanDerhei. The bigger worry is about those people who keep saying they are going to retire at a later date.
Those folks need a better plan. At best, there’s only a 50% chance they’ll be able to retire later or work longer.
“The findings show that workers who have higher levels of confidence have taken actions such as thinking about how they’d like to occupy their time in retirement, preparing a written financial plan for retirement and talking with an adviser about retirement planning,” says Luke Vandermillen, vice president of retirement and income solutions at Principal.
Having a plan is better than not having a plan
To be fair, the results in the RCS haven’t changed much over the years. Just 21% of workers in the 2016 survey said they are “very confident” they’ll have enough money to retire comfortably. And, with the exception of 2007 when a record high 27% were very confident and 2013 when record low 13% were very confident, the number of workers who are very confident they’ll have enough money for a comfortable retirement has remained (sadly, given all the money the financial services industry and others spend on financial education) at one in five for the past 26 years. It’s like watching, some might say, a glacier move.
What’s is noteworthy, however, is the stark difference in retirement confidence between workers who have a retirement account—an IRA, a 401(k), a defined-benefit plan, for instance—and those who don’t have a plan.
Workers reporting they or their spouse have money in a defined-contribution plan (a 401(k) and the like) or IRA or have benefits in a defined-benefit plan from a current or previous employer are more than twice as likely as those without any of these plans to be very confident (26% with a plan vs. 10% without a plan), according to the EBRI report.
In addition, workers without a plan are more than three times as likely to say they are not at all confident about their financial security in retirement (11% with a plan vs. 38% without a plan).
What’s more, the percent of workers with a retirement account who are very confident has increased greatly; it’s risen from 14% in 2013 to 26% in 2016. By contrast, the percent of workers with no retirement accounts who are very confident has remained steady at roughly 10%.
“I’m almost happy that there’s not an increase in confidence among those without a plan, because then it would just be false optimism,” said VanDerhei. “I’d rather have people know that they have a problem, then hopefully the next step is that they are going to do something about it as opposed to… thinking they are going to early and that they are still going to have a very comfortable retirement.”
One good thing about the financial market crisis of 2008-09, VanDerhei said in an interview, is that it shook false confidence out of workers who hadn’t saved anything for retirement but thought they would have a comfortable retirement.
Joe Ready, head of Wells Fargo Institutional Retirement and Trust, said: “The data support the key themes we have discussed often around the strategies to fund the gap, which include planning to work longer and/or save more later ‘when I earn more.’”
“These strategies, which might seem rational, carry risk should the unexpected occur—for example, unexpected job loss or health issues that cause earlier-than-planned retirement,” he said.
In terms of savings, Ready said, “we know that the No. 1 key driver for reaching your retirement goal is to save early and often at a rate of 10% or more. People value the workplace plan as a method to help them save for retirement as evidenced by the confidence numbers in this survey, and we also know from our survey data that people with access to a 401(k) or similar plan save on average three times more than those without access” to workplace plans, he said.
Correlation between having an adviser and retirement confidence
VanDerhei also said workers who talked with a professional financial adviser about retirement planning are more than two times more likely to be more very confident about retirement than those workers who haven’t talked with a financial adviser. To wit: about 32% of workers who talked with a financial adviser are very confident while just 16% of those who haven’t talked to a financial adviser.
And those findings are similar to a similar study by VanDerhei and his colleague at EBRI which found that those using an online calculator or asking a financial adviser appear to set more adequate savings targets, as measured by the probability of not running short of money in retirement. Read A Little Help: The Impact of Online Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey.
Of note, the 2016 RCS found that 75% of workers either strongly agree or agree that the advice they receive from a professional financial adviser is in their best interest.
But VanDerhei cautioned against making too much of that finding, especially in light of efforts by the Labor Department to put forth a new conflict-of-interest rule (the fiduciary rule). That Labor Department’s proposed rule defines who is and who isn’t a fiduciary under the Employee Retirement Security Act of 1974 (ERISA.) Under that rule, advisers would have to act in the best interest of their clients regarding not only their 401(k) plans, but their IRAs and similar retirement plans.
According to VanDerhei, the 2016 RCS did not have the sample size to isolate people who had just changed jobs and had to make an IRA rollover decision and who actually used a financial adviser with that decision. That would get more at the question the Labor Department is trying address with its new rule.
Link between calculating nest egg and retirement confidence
According to EBRI’s study, many workers continue to be unaware of how much they need to save for retirement. In fact, less than half (48%) of workers report they and/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.
But more should, especially since there’s a correlation between doing a retirement savings need calculation and confidence. In fact, 31% of those who have tried to figure out how much money they will need to have saved by the time they retire so that they can live comfortably are very confident, while just 13% of those who have not crunched their nest egg numbers are very confident.
The most recent RCS also found a correlation between the amount of money one would have to have in savings and investments, not including the value of a primary residence or a defined-benefit plan, and retirement confidence. Nearly 50% of those who saved less than $1,000 would be not at all confident about being able to afford a comfortable retirement, while the opposite is true for those with $1 million or more saved in their nest egg: Some 50% say they would be very confident about having a comfortable retirement.
Public policy implications
Even though EBRI is nonpartisan, the findings in the 2016 RCS do raise some interesting public policy questions. For instance, given the link between having a retirement account/plan and retirement confidence it seems that now would be a good time to explore doing here in the U.S. what’s been done in the U.K.: Mandate that all employers offer access to a retirement plan in the workplace.
There would be several benefits to doing this: First, more than one in five workers would become very confident about being able to retire comfortably.
Second, retirement coverage would improve greatly. At the moment, coverage (the percent of workers covered by a workplace retirement plan) is about 50% according to some estimates.
And equally important, if every employer in the U.S. offered a workplace retirement plan (a federal automatic IRA), the nation’s overall retirement savings shortfall ($4.13 trillion, according to EBRI) would fall by 20%, according to VanDerhei.
Finally, it would eliminate the need for each and every state to sponsor—as is happening now—their own flavor of an automatic IRA, some of which might compromise ERISA, the nation’s retirement laws. Of note, the percent decline would be higher than 20% were it not for the long-term cost problem, said VanDerhei.
“If I’m doing public policy I would be a lot more concerned on whether people do have adequate retirement income than whether or not they are actually confident,” said VanDerhei.
Other noteworthy 2016 RCS findings
Longevity: The 2016 RCS also found there’s a correlation between those who perceive the possibility of living to 85 or 95 and interest in buying longevity insurance, a deferred income annuity (DIA) or qualifying longevity annuity contract (QLAC). Read How Much Can Qualifying Longevity Annuity Contracts Improve Retirement Security?
Assets: A sizable percentage of workers say they have no or very little money in savings and investments. These workers without savings are concentrated among those without a retirement plan. Among RCS workers providing this type of information and not having a retirement plan, 83% report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined-benefit plans, is less than $10,000. In contrast, 35% of workers with a retirement plan say their value of these assets is $100,000 or more.
Saving: The RCS finds that the percentage of workers who reported they and/or their spouse had saved for retirement peaked in 2009 (to 75%), but declined to the mid- to high-60% level thereafter and remains at that level (69% in 2016).
Debt: The presence of debt has a significant impact on workers’ confidence. In 2016, just 9% of workers who describe their debt as a major problem say they are very confident about having enough money to live comfortably throughout retirement, compared with 32% of workers who indicate debt is not a problem. On the other hand, half of workers with a major debt problem are not at all confident about having enough money for a financially secure retirement, compared with 12% of workers without a debt problem.
Retirement planning: Workers’ confidence that they are doing a good job of preparing financially for retirement continues to rebound from the low in 2013. While less than one-third (28%) indicate they lack confidence in their financial preparations for retirement and more than two-thirds indicate they are confident (28% very confident and 43% somewhat confident), less than half (48%) of workers report they and/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. More than a third of all workers (39%) simply guess at how much they will need to accumulate, rather than doing a systematic retirement needs calculation.
Confidence: Retiree confidence in having enough money for a comfortable retirement, which historically tends to exceed worker confidence levels, continued to increase in 2016, reaching 39% who are very confident (up from 18% in 2013). The percentage not at all confident was 12% (statistically unchanged from 14% in 2013).
Debt: Retirees are more likely than workers to describe their level of debt as not a problem. Sixty-seven percent of retirees and 44% of workers indicate they do not have a problem with their level of debt.
Leaving the workforce: As before, the RCS finds a considerable gap exists between workers’ expectations and retirees’ experience about leaving the workforce. The percentage of workers who expect to retire after age 65 has increased, from 11% in 1991 to 37% in 2016; however, only 15% of retirees in 2016 said they said they actually retired after age 65 and many report they left the workforce for reasons beyond their control, such as health or changes at their company.
Full results of the latest RCS are published in the March 2016 EBRI Issue Brief, “The 2016 Retirement Confidence Survey: Worker Confidence Stable, Retiree Confidence Continues to Increase,” at www.ebri.org