Needs “Assessment”

By Nevin Adams, EBRI

Nevin Adams

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.

 

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.

Notes

[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 percenteach 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.

Silver Linings

By Nevin Adams, EBRI

Nevin Adams

We all know people who manage to find the bright side of things, no matter how dire the situation—the folks who can spot a silver lining in every cloud. Then, of course, there are those who have an uncanny ability of discerning the cloud in every silver lining. In my experience, those in the former category know, and acknowledge, their inclination to accentuate the positive.

However, I’ve generally found that those in the latter category don’t view themselves as negative or pessimistic. Rather, they are inclined to see their perspective on the world as “realistic.”

A recent EBRI analysis[1] found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers—between 83 and 86 percent of them, in fact—with an annual income of at least 60 percent of their preretirement pay on an inflation-adjusted basis. Even at an 80 percent replacement rate, 67 percent of the lowest-income quartile would still meet that threshold. Those projections improve even more when you assume automatic enrollment and an annual contribution acceleration of 1 percent in 401(k) plans.

A more recent analysis[2] using EBRI’s Retirement Security Projection Model® (RSPM) found that, due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement improved—slightly (between 0.5 and 1.6 percentage points, based on the EBRI Retirement Readiness Ratings (RRRs). For early Boomers (those on the brink of retirement), the analysis found that more than half (56.7 percent) were projected not to run short of the funds they need to cover projected retirement expenses. On the other hand, nearly half are projected to run short (though not “out” of money, since Social Security benefits would continue to be paid).

In 2012, EBRI estimated that the national aggregate retirement income deficit number, taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized “as needed,” was $4.3 trillion for all Baby Boomers and Gen Xers.[3]

Now, certainly compared with some of the figures[4] one hears bandied about these days, those might be considered relatively encouraging numbers. Some might even consider them optimistic, a “silver lining” in a looming retirement “crisis”5 cloud.

What the EBRI data show is that, based on current trends and savings patterns, many individuals will fare better financially in retirement than the headlines suggest—and a large number will not. Despite the clarion calls for action, and some shifts in the underlying dynamics, this is not a new issue for America. If a crisis looms, it is surely one of the most widely anticipated, long-standing, and debated issues of the past half-century.

EBRI data and modeling have previously quantified the kinds of plan design and policy changes that can help—and hinder—those results. The true “silver lining” is that there is yet time for many of those currently at risk of running short of funds to remedy that situation[6].

Notes


[4] See “Whether Forecasts” online here.

5 For some perspective on the existence of a retirement “crisis,” see Dallas Salisbury’s keynote address at the Pensions&Investments West Coast Defined Contribution Conference online here.  

6 Particularly those who Chooseto$ave®org for your future!  Check out the resources at www.choosetosave.org, including the Ballpark E$timate.    

“Off” Putting

By Nevin Adams, EBRI

Nevin Adams

I’ve never been very keen on going to the dentist.  As important as I believe dental hygiene to be, I’ve come to associate my visits with the dentist with bad things: some level of discomfort, perhaps even pain, a flossing lecture from the hygienist, at the very least.  Most of which is readily avoided by doing the things I know I should be doing regularly – brushing, flossing, a better diet.  And knowing that I haven’t done what I should have been doing, I have good reason to believe that my visit to the dentist will be a negative experience – and so I put it off.

However, it’s not as though the postponement makes the situation any better; if anything, the delay makes the eventual “confrontation” with reality worse.  That’s what retirement planning is like for many: They know they should be saving, know that they should be saving more, but they hesitate to go through the process of a retirement needs calculation because they are leery of the “pain” of going through the exercise itself, or perhaps even afraid that their checkup will confirm their lack of attentiveness to their fiscal health.  And, like the postponed dental visit, putting it off not only does nothing to rectify the situation, the passage of time (without action) may even allow the situation to worsen.

Indeed, the Retirement Confidence Survey (RCS)[i] has previously found that workers who have done a retirement needs calculation tend to be considerably more confident about their ability to save the amount needed for a financially comfortable retirement than those who have not done so, despite the fact that those doing a calculation tend to cite higher retirement savings goals.  In the 2013 RCS, 31 percent who have done a calculation, compared with 14 percent who have not, say they are very confident that they will be able to accumulate the amount they need, while 12 percent who have not done a calculation, compared with 3 percent who have, report they are not at all confident in their ability to save the amount needed for a financially comfortable retirement.

Next week we’ll commemorate America Saves Week[ii], an annual opportunity for organizations to promote good savings behavior[iii] and a chance for individuals to assess their own saving status.  Not because saving is something you should do once a year, or that reconsidering your financial goals and progress is well-suited to a particular week on the calendar, but because it IS something that should be done regularly in order to be effective.

Over time, I have found that when I make (and keep) regular dentist appointments, those visits are much less painful, and considerably less stressful than the times when I have gone “too long” between appointments.

Similarly, regular savings checkups – like those inspired by events like America Saves Week – can be a lot less “painful” than you might think.

Notes

You can assess your savings plan here.

For a list of six reasons why you—or those you care about—should save, and specifically save for retirement now, see “Sooner or Later“:


[i] Information from the 2013 Retirement Confidence Survey (RCS) is available online here. Organizations interested in underwriting the 2014 RCS can contact Nevin Adams at nadams@ebri.org.  

[ii] America Saves Week is an annual event where hundreds of national and local organizations promote good savings behavior and individuals are encouraged to assess their own saving status. Coordinated by America Saves and the American Savings Education Council, America Saves Week is February 24–March 1, 2014, a nationwide effort to help people save more successfully and take financial action. More information is available at www.americasavesweek.org.

[iii] Organizations interested in building/reinforcing a workplace savings campaign can find free resources at www.asec.org  including videos, savings tips, and the Ballpark E$stimate® retirement savings calculator, courtesy of the American Savings Education Council (ASEC).

Model “Hones”

By Nevin Adams, EBRI

Nevin Adams

After a winter filled with predictions of winter weather that never quite measured up to the forecasts, the nation’s capital (and the Southeast) finally got a taste of what those in the Midwest and Northeast have been contending with for weeks.  Not that there haven’t been close calls here, but up until this week, the multitude of factors that have to come together to produce a significant snowfall here—hadn’t.  Much to the discomfiture of those who ply their trade making such predictions, it should be noted.

While Mother Nature can be notoriously fickle, technologies like Doppler radar are able to discern with greater precision real-time activity which can be fed into sophisticated computer models that draw on the experience of the past to extrapolate a series of potential outcomes—some deemed more likely than others.  Projected outcomes that, despite the recent experience here, do an increasingly accurate job of helping each of us plan our daily commute or that vacation a couple of weeks hence.

Arguably, predictions about retirement readiness are even more complicated than weather forecasting, though there are certain similarities.  Done properly, they require a foundation in knowing the actual resources available to individuals—and an ability, through the use of sophisticated computer models, to forecast the impact of current behaviors on future outcomes.  Those models must also consider the likelihood and timing of certain external factors, and their impact on resources, and to project if (or when) those resources will run short against lifespans and circumstances as unique and variable as the American population.

Of course, those computer models require updating on a regular basis to properly account for changes in assumptions (and realities).  A recent EBRI Issue Brief[1] noted that, due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement increased between 0.5 and 1.6 percentage points (when aggregated by age cohort), based on the Employee Benefit Research Institute (EBRI) Retirement Readiness Ratings (RRRs).[2]

EBRI’s analysis, which analyzes the major factors that cause retirement outcomes to differ, and their impact, found that, among other things, eligibility for participation in an employer-sponsored 401(k)-type plan remains one of the most important factors for retirement income adequacy.  In fact, Gen Xers in the lowest-income quartile with 20 or more years of future eligibility in a defined contribution plan are half as likely to run short of money as those with no years of future eligibility.

Not surprisingly, the report also noted that the risks of a long life and high long term-care costs drive huge variations in retirement income adequacy—and suggested that annuities and long-term care insurance could mitigate much of the variability in retirement income adequacy at or near retirement age.

Of course, while a broad-based forecast is sufficient for the local weather, and a broad-based sense of the nation’s retirement readiness is powerful fodder for purposes of setting public policy goals, individual forecasts—in order to be accurate—require more customized inputs.[3]  

Notes


[1] “What Causes EBRI Retirement Readiness Ratings™ to Vary: Results from the 2014 Retirement Security Projection Model®” is available online here.

[2] EBRI’s proprietary Retirement Security Projection Model® (RSPM), unlike many other models, takes into account a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of age and income) as well as health insurance and out-of-pocket, health-related expenses, plus stochastic expenses from nursing home and home-health care (at least until the point such expenses are covered by Medicaid).  A chronology of the EBRI Retirement Security Projection Model® is available online here.  

[3] Fortunately, individuals who want a sense of their retirement readiness can check out EBRI’s BallparkE$timate,® along with the other materials available at www.choosetosave.org

A Year-End Review

By Nevin Adams, EBRI

Nevin Adams

This is the time of year when many people both look back at the year just past—and ahead to the next with a fresh perspective. It’s also that time of year when many make lists.

So, whether you’re looking to make some New Year’s resolutions, or just looking to improve your overall financial situation, here are 10 things to check off your 2013 list—and to get your 2014 list off to a strong start.

 

  1. Deal with debt (see Savings Resolutions for the New Year).
  2. Establish a savings goal for retirement (see Estimate “Ed”).
  3. Save for retirement—at work, or on your own (see Saving for Retirement Outside of Work).
  4. Save early so that your savings can work for you (see The “Magic” of Compounding).
  5. If you do have a retirement plan at work, make the most of it (see Making the Most of your Retirement Plan).
  6. Maximize your savings—see if you’re eligible for the Savers’ Credit (see Credit Where Credit is Due).
  7. See if a Roth 401(k) makes sense for your situation (see To Roth or Not?).
  8. Know how much you’re paying for your retirement savings (see Shedding Some Light on your Workplace Retirement Plan Fees).
  9. Keep an eye on your retirement savings investments (see Are Your Savings Investments Over-weighted?).
  10. Don’t forget that you may have other important savings goals as well (see College “Education”–Saving For College).

Of course, a good place to start—any time—is to Choose to Save.® You can find a wide variety of tools and resources—including the popular and widely recommended BallparkE$timate—at www.choosetosave.org[1]

If you are interested in, or working on, issues of financial literacy or savings education, you’ll want to check out $avings Account$, a free monthly update from the American Savings Education Council (ASEC) on the latest research and updates on new (and old but relevant) tools, as well as keep you up-to-date on various events, conferences, and symposiums relevant to ASEC’s Mission: To make saving and retirement planning a priority for all Americans.  You can sign up online here.

Notes


 

[1] Organizations interested in building/reinforcing a workplace savings campaign can also find a variety of free resources there, courtesy of ASEC.  Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

“Believe” Able

By Nevin Adams, EBRI

Nevin Adams

Nevin Adams

In that holiday classic “Miracle on 34th Street,” a man named Kris Kringle (who claims to be “the one and only” Santa Claus) winds up having his sanity challenged in court. Ultimately, the judge dismisses charges that would have resulted in Kringle’s institutionalization—not because he actually is persuaded to believe by the evidence that Kris is the REAL Santa Claus, but because he finds it convenient to demur to the determinations of a higher authority (in this case, the US Postal Service).

While belief may not always be a portent of reality, it can be a powerful force, as any parent who has ever nurtured Santa’s existence well knows.

The 2013 EBRI/Greenwald & Associates Health and Voluntary Workplace Benefits Survey¹ (WBS) reveals that most workers believe their employers or unions will continue to provide health care insurance— although there have been employer surveys indicating that, at some point in the future, some may not. Not that workers fail to appreciate future uncertainties: While 46 percent of worker respondents to the WBS indicate they are extremely or very confident about their ability to get the treatments they need today, only 28 percent are confident about their ability to get needed treatments during the next 10 years.

Similarly, when it comes to retirement, the Retirement Confidence Survey² has, for nearly a quarter century now, shown a remarkable resilience in worker confidence regarding their financial future in retirement, belying the aggregate savings levels indicated in that same survey. Over the course of that survey, we’ve seen confidence wax stronger and then wane―and while we’ve seen distressingly low levels of preparation, more recently we’ve also seen a growing awareness of the need for those preparations. The RCS has also documented a consistent trend in workers believing they will be able to work, and to work for pay, longer than the experience of retiree respondents suggests will be a viable option.

Next month we’ll field the 24th annual version of that Retirement Confidence Survey, where we will (among other things) seek to gain a sense of American workers’ preparation for (and confidence about) retirement, as well as some idea as to how those already retired view the adequacy of their own preparations. Is a lack of worker confidence about retirement finances a troubling indicator? Or does it suggest that they have a greater appreciation for the need to prepare?

Later in the year the WBS will, as it has since 1998, probe sentiments about health care and voluntary benefits: Will workers sense a continued commitment by their employers and unions to provide health care coverage? If not, how might that affect their commitment to their work and their workplace? How might concerns about health coverage affect and influence retirement preparations?

In the cinematic “Miracle,” there seems to be a connection between believing something will happen and its reality. Little Susan Walker goes so far as to intone “I believe… I believe… It’s silly, but I believe!” even as she stumbles upon the home of her dreams.

In the real world, the linkage between belief and reality isn’t generally so convenient. And employers, providers, and policy makers alike, know that being able to anticipate those potential gaps between belief and a future reality can be critical.

In addition to providing financial support to two of the industry’s most highly regarded employee benefit surveys, underwriters of the RCS and WBS have access to special early briefings on the findings, in addition to a number of other benefits. If you’d like to know more, email Nevin Adams at nadams@ebri.org

You can find additional information about the RCS online here and information about the WBS (previously called the Health Confidence Survey) online here.

Notes

¹ See “2013 Health and Voluntary Workplace Benefits Survey: Nearly 90% of Workers Satisfied With Their Own Health Plan, But 55% Give Low Ratings to Health Care System,” online here.

² See “The 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many,” online here.

“Staying” Power

By Nevin Adams, EBRI

AdamsWhen we moved into our last home―an old house, and one in which the prior family had lived for quite some time―we found a set of markings on a doorframe.  Markings that appeared to indicate the height―and growth patterns over time―of the children of the former owners.  We took note of this at the time, but those markings didn’t last long after we moved in.  After all, while our kids were still growing, and they were now going to live in the same house, there was little point in assessing their progress against that of the former residents.

We’ve noted before the shortcomings of metrics such as an “average” 401(k) balance (see “Above” Average, online here ), which generally aggregate the balances of participants in widely different circumstances of age and tenure―everything from those just entering the workforce who have relatively negligible 401(k) balances with those who may have been saving for decades.  While these averages can, over time, provide a sense of the general direction in which things are moving, they’re not generally a very accurate barometer when it comes to assessing actual retirement accumulations. That’s one reason why the annual updates of the EBRI/ICI 401(k) database also report average balances by age and tenure.

That said, people change jobs, employers change 401(k) providers, and so, even in a repository as comprehensive and long-standing as the 24-million-participant EBRI/ICI 401(k) database, those “averages,” of necessity, include the experience of different individuals over time.  In order to accurately assess the impact of participation in 401(k) plans over time, and to understand how 401(k) plan participants have fared over an extended period, it is important to analyze a group of consistent participants―a longitudinal sample.

A recent EBRI Issue Brief (jointly published with the Investment Company Institute), “401(k) Participants in the Wake of the Financial Crisis: Changes in Account Balances, 2007–2011,” did just that. Drawing on the actual activity of 8.6 million participant accounts, it found that at year-end 2011, the average 401(k) account balance of the consistent group of participants during 2007‒2011 was $94,482, or 60 percent larger than the average account balance of $58,991 among participants in the entire EBRI/ICI 401(k) database. The median (mid-point) 401(k) account balance among the consistent participants was $42,082 at year-end 2011, about two-and-a-half times the median account balance of $16,649 of participants in the entire EBRI/ICI 401(k) database.

Now, in any given year the change in a participant’s account balance is the sum of several factors: new contributions; total investment return on account balances; and withdrawals, borrowing, and loan repayments.  The influence of each of those factors on individual account balances varied according to individual circumstances; participants who were younger or had fewer years of tenure experienced the largest percentage increases in average account balance between year-end 2007 and year-end 2011, and, for those younger, smaller account balance participants, contributions were responsible for a significant percentage of the growth in their account balances (consistent participants in their 20s saw their accounts nearly triple between 2007 and 2011).  Older participants experienced smaller percentage gains, and most of that was from investment returns.  Moreover, some of those balances were doubtless affected by the initiation of retirement-related withdrawals.

Still, and as the EBRI Issue Brief outlines, the trends in the consistent group’s account balances highlight the accumulation effect―the staying power―of ongoing 401(k) participation.

“401(k) Participants in the Wake of the Financial Crisis: Changes in Account Balances, 2007–2011” is available online here.