“Drawing” Board?

By Nevin Adams, EBRI

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While drawing boards have been used by engineers and architects for more than two centuries, the phrase “back to the drawing board” is of much more recent origin, coined by the Peter Arno in a cartoon first published in the March 1, 1941 issue of New Yorker magazine.(1) The cartoon features a crashed plane in the background, a parachute in the distance, several military officials and rescue workers rushing to help/investigate—and one remarkably nonchalant individual, walking in the opposite direction with a rolled up document tucked under his arm as he comments, “Well, back to the old drawing board.”

For all the much-deserved focus on retirement savings accumulations, a growing amount of attention is now directed to how those already in (and fast-approaching) retirement are actually investing and drawing down those savings.

A recent EBRI analysis(2) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) took a withdrawal from that account. That pace slowly increases to 40.5 percent by age 69 before jumping to 54.1 percent at age 70, and by the age of 79, almost 85 percent of households with an IRA took a distribution.

IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.

The EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that appears to be a direct result of the required minimum distribution (RMD) rules in the Internal Revenue Code.(3) Those rules require that traditional IRA account holders begin to take at least a specific amount from their IRA no later than April 1 of the year following the year in which they reach age 70-½, or else suffer a fairly harsh tax penalty.

In fact, at age 71, 71.1 percent of households owning an IRA that took a withdrawal reported that they took only the RMD amount, increasing to 77.4 percent at age 75, 83.2 percent at age 80, and 91.1 percent by age 86.

However, the EBRI report noted that IRA-owning households not yet subject to the RMD—those headed by individuals between the ages of 61 and 70—made larger withdrawals than older households, both in absolute dollar amounts as well as a percentage of IRA account balance. Indeed, the bottom-income quartile of this age group had a very high percentage (48 percent) of households that made an IRA withdrawal—and their average annual percentage of account balance withdrawn (17.4 percent) was higher than the rest of the income distribution. Moreover, those younger households that made IRA withdrawals spent most of it.

While a significant percentage of those in the sample are drawing out only what the law mandates, the data indicate that more of those in the lower-income groups not only draw money out sooner, but also draw out a higher percentage of their savings—perhaps too early to sustain them throughout retirement.(4)

Planning and preparation matters—not only for retirement savings, but in retirement withdrawals. Because for those whose retirement resources run short too soon, it’s generally also too late to go “back to the drawing board.”

Notes

(1) You can see the original cartoon online here.

(2) The data for this study come from the University of Michigan’s Health and Retirement Study (HRS), which is sponsored by the National Institute on Aging. See “IRA Withdrawals: How Much, When, and Other Saving Behavior,” online here.

(3) As noted in a previous post (see “Means Tested”), there are advantages to a drawdown strategy based on the schedule provided by the Internal Revenue Service (IRS) for required minimum distributions, or RMDs. See also Withdrawal “Symptoms.”

(4) The EBRI Retirement Readiness Ratings™ indicate that approximately 44 percent of the Baby Boomer and Gen-Xer households are simulated to be at-risk of running short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted. Those individuals may well become part of the significant percentage of retirees who eventually must depend on Social Security for all of their retirement income. See “All or Nothing? An Expanded Perspective on Retirement Readiness.”

“Half” Baked?

By Nevin Adams, EBRI

I’ve never been much good in the kitchen.  I’ve neither the patience/discipline to follow most recipes, nor the innate sense for the right balance of ingredients that those with culinary talent seem to have.  That said, I learned the hard way years ago that if you mix the right items in the wrong order, or the wrong amounts of the right items, leave something to bake too long – or not long enough – the results can be disastrous.

A recent report by the Pew Charitable Trusts posed the question, “Are Americans Prepared for Their Golden Years?”  Perhaps not surprisingly, the report indicated that many are not.  What was surprising, however,  was the assertion that Gen-Xers (those born between 1966 and 1975), in the Pew analysis, looked to be in even worse shape than either early or late Boomers.

Previous EBRI research has found that approximately 44 percent of simulated lifepaths for Baby Boomer and Gen-Xer households are projected to run short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted.  However, that includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.  Looking specifically at Gen X, many of which have decades of saving accumulations still ahead of them, nearly one-half (49.1 percent) of the simulated lifepaths of that demographic are projected to have retirement resources that are at least 20 percent more than is simulated to be needed, while approximately one-third (31.4 percent) are projected to have between 80 percent and120 percent of the financial resources necessary to cover retirement expenses and uninsured health care costs (see Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model).

However, in reviewing the Pew report and its associated methodology, several key differences in approach emerge.  On the one hand, the Pew report assumes that workers will receive credit for a full career in the accrual of Social Security benefits, and it also imputes a full-career accrual of defined benefit pension benefits – though many individuals don’t wait till full retirement age to collect on the former (accepting lower benefits), and many don’t accumulate enough service to be entitled to the latter (see “The Good Old Days”, “Employee Tenure Trends, 1983–2012“).  This assumption likely exaggerates the retirement readiness of older workers, who are more likely to have some defined benefit accrual.

On the other hand, the Pew report appears to assume no further contributions, either by employer or employee, to the defined contribution balances as of 2010.  That’s right, no further contributions beyond the self-reported participant balances of 2010, and no earnings projection on those assumed non-existent contributions, either.  This assumption likely serves to understate the future retirement readiness of younger workers, who have years, and in many cases decades, of savings ahead of them.

Based on the combination of those assumptions and the well-documented trend away from defined benefit plans and toward a greater reliance on defined contribution designs, it’s little wonder that the Pew report concludes that Gen Xers will be worse off than Boomers.

In sum, whether you’re baking a cake or evaluating research conclusions, if it seems a bit “off,” it’s generally a good idea to carefully review the recipe – and double check the ingredients.

Notes

The Pew Charitable Trusts report, “Retirement Security Across Generations” is available online here.

“Like” Minded?

By Nevin Adams, EBRI

Adams

Several weeks back, my wife and I sat down with a financial planner to review and update our financial plans. Doing so brought with it a bit of personal trepidation since, being “in the business” I not only had a working knowledge of what needed to be done, I also had a pretty good sense of what hadn’t been done, and what hadn’t been done the way it should have been done in some time. As I surrendered copies of the statements from my three separate 401(k) accounts, rollover IRA, traditional IRA, and SEP-IRA, I found myself wondering (again) why I hadn’t gotten around to consolidating some of those accounts.

More and more Americans are finding themselves with multiple savings accounts, not only because of the relatively consistent pattern of job change in the American economy (see “Tenure, Tracked”), but because those job changes frequently result in rollovers to individual retirement accounts. On the other hand, in recent years, it has gotten easier to simply leave your 401(k) with a prior employer’s plan, and, with the convenience of online access and/or call center support, and the allure of inertia, many have surely opted to forestall, if not postpone the decision.

Those decisions have, of course, made it harder to assess the true accumulations in these plans. Indeed, today’s “average” 401(k) calculation suffers not only from being an average of widely varied tenure and age components, it increasingly represents the average of those balances with only a current employer plan.

But if you’re an individual worried about keeping up with all those accounts―or a regulator or policymaker concerned about the growing complexity of that task for those individuals―you might well wonder how those accounts are being managed? Are the investment allocations in those IRAs different from that of the 401(k)s?

New EBRI research (see “Retirement Plan Participation and Asset Allocation, 2010”) reveals that, in addition to demographic factors related to family heads, asset allocation within a family head’s retirement plan does seem to be affected by his or her ownership of other types of retirement plans.

According to the research, which was based on estimates from the Federal Reserve’s 2010 Survey of Consumer Finances,¹ those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan, and those who own a defined benefit (DB) plan and a 401(k)-type plan are also less likely to allocate the investments of that defined contribution plan to all interest-earning assets. Moreover, those family heads who are invested more heavily in stocks in their 401(k)-type plan and also own an IRA have a high probability of also being heavily invested in stocks in their IRA.

The bottom line? Participants in these plans generally invest them in similar manners, although some participants did have significantly different allocations across the two plan types. What we don’t know is if those similarities―and differences―are the result of conscious choice based on an awareness of these various plans, a consequence of investments in target-date or balanced funds, or mere coincidence.

Notes

¹ It is worth noting that, while these results provide important information on behavior within retirement savings plans, it is self-reported data from a survey of a small sample of respondents, and does not include the type of detail on asset allocation within 401(k) plans that is provided by the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project or on IRAs that is provided by the EBRI IRA Database. However, these results do provide some evidence of how participants who own both types of retirement plans allocate their assets among both types of plans, and this can be evaluated with future results from the combined IRA and 401(k) database that EBRI is currently completing.

“Gamble” Gambit

By Nevin Adams, EBRI

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This past week PBS’ Frontline ran a segment on retirement titled “The Retirement Gamble.”

During that broadcast several individual cases were profiled—a single mother who lost her job (and a lot of money that she had apparently overinvested in company stock); a middle-aged couple whose husband had lost his job (and a big chunk of their 401(k) investment in the 2008 financial crisis); a couple of teachers who had seen their retirement plan investments do quite well (before the 2008 financial crisis); a 32-year-old teacher who had lost money in the markets and found herself in an annuity investment that she apparently didn’t understand, but was continuing to save; and a 67-year-old semi-retiree who had managed to set aside enough to sustain a middle-class lifestyle. The current income and/or working status of each was presented, along with their current retirement savings balance.

Much of the promotional materials around the program focused on fees, and doctoral candidate Robert Hiltonsmith featured prominently in the special. Hiltonsmith, as some may recall, was the author of a Demos report on 401(k) fees released about a year ago—one that claimed that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees (Demos report online here), according to its model—which, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund.

A fair amount of the program was devoted to the trade-offs between active and passive/index investment strategies, and the lower fees generally associated with the latter. Participant savers might not always choose them, but PLANSPONSOR’s 2012 Defined Contribution Survey found that nearly 8 in 10 (77.4 percent) of the nearly 7,000 plans surveyed already include index fund(s) on their menu, and that nearly 9 in 10 of the largest plans do. Similarly, the Plan Sponsor Council of America’s 55th Annual Survey lists “indexed domestic equity funds” as one of the fund types most commonly offered to participants (82.8 percent of plans).

“Balance” Perspectives

Hiltonsmith, 31, “had no savings to lose” in the 2008 financial crisis, according to the Frontline report, but after entering the workforce he began saving in his workplace 401(k). However, “even in a relatively good market, he began to sense that something was wrong,” the voiceover notes. Hiltonsmith explained: “I have a 401(k), I save in it, it doesn’t seem to go up… I kept checking the statement and I’d be like, why does this thing never go up?”

For some time now, EBRI has tracked the actual experience in 401(k) accounts of consistent participants, by age and tenure. Looking at the experience of workers age 25–34, with one to four years of tenure, and considering the period Jan. 1, 2011, to Jan. 1, 2013, the average account balance of consistent participants (those who continued to participate in their workplace 401(k) plan during that time period) experienced a nearly 84 percent increase (see graphic, online here).  Granted, at that stage in their career, most of that gain is likely attributable to new contributions, not market returns—but it is an increase in that savings balance, and one that Hiltonsmith,(1) as a consistent participant-saver should have seen as well.

Pension Penchant

The framing of the retirement “gamble” was that “it used to be much easier,” in 1972 when, the Frontline report states, “…42 percent of employees had a pension…” But one point the Frontline report ignores (as do many general media reports on this topic) is that there’s a huge difference between working at an employer that offers a pension plan (the apparent source of the Frontline statistic), and actually collecting a pension based on that employment. Consider that only a quarter of those age 65 or older actually had pension income in 1975, the year after ERISA was signed into law (see “The Good Old Days,” online here).  Perhaps more telling is that that pension income, vital as it surely has been for some, represented less than 15 percent of all the income received by those 65 and older in 1975.

In explaining the shift to 401(k) plans, the Frontline report notes that, “over the last decade, the rules of the game changed…” and went on to note that people started living longer, there were changes in accounting rules, global competition, and market volatility that affected the availability of defined benefit pension plans. While all those factors certainly did (and still do) come into play, another critical factor—one unmentioned in the report, and one that hasn’t undergone significant change in recent years—is that most Americans in the private sector weren’t working long enough with a single employer to accumulate the service levels required to earn a full pension.

For years,(2) EBRI has reported that median job tenure of the total workforce—how long a worker typically stays at a job—has hovered around four years since the early 1950s, and five years since the early 1980s. Under standard pension accrual formulas, those kind of tenure numbers mean that, even among the minority of private-sector workers who “have” a pension, many would likely receive a negligible amount because they didn’t stay on the job long enough to earn a meaningful benefit from that defined benefit pension.(3) Consequently, one could argue that American private-sector workers have been “gambling” with their pension every time they made a job change.

The Gamble?

It is, of course, difficult to evaluate the individual circumstances portrayed in the Frontline program from a distance, and via the limited prism afforded by the interviews. Nonetheless, even those in difficult financial straits were still drawing on their 401(k): the single mother had apparently managed to hang on to her underwater mortgage by tapping into her 401(k) savings, as had the couple who incurred a surrender charge by prematurely withdrawing funds from what appeared to be some kind of annuity investment. While this “leakage” was described as a problem, it does underline the critical role a 401(k) plan can play in the provision of emergency savings and financial security during every “life-stage.” Moreover, while the report focused on the circumstances of several individuals who had saved in a workplace retirement plan, one can’t help but wonder about the circumstances of those who don’t have that option.

The dictionary defines a gamble is a “bet on an uncertain outcome.” While the characterization might seem crude, retirement planning—with its attendant uncertainties regarding retirement date, longevity risk, inflation risk, investment risk, recession risk, health care expenses, and long-term care needs(4)—could be positioned in that context.

However, the data would also seem to support the conclusion that this retirement “gamble” isn’t new—and that it may be one for which, because of the employment-based retirement plan system, tomorrow’s retirees have some additional cards to play.

 Notes

You can watch the Frontline program (along with some additional materials, and expanded transcripts of some of the program interviews) online here.

(1) The Frontline investigation also seemed to represent something of a voyage of discovery for correspondent Martin Smith, who apparently has dipped into his 401(k) several times over the years. In a moment of subtle irony, he notes that he runs a small company with a handful of employees, but was too busy to look at the “fine print” of his own company’s retirement plan, going on to express confusion as to how these funds got into his plan in the first place. Of course, as the business owner, he was likely either the plan sponsor, or hired/designated the person(s) who made that decision.

(2) EBRI provided all of the data referenced here—and much more—to the Frontline producers. In fact, Dallas Salisbury was interviewed on tape for nearly two hours, so we know they had the full picture on tape. That may be what makes the Frontline program the most disappointing, knowing that the program could have presented a balanced picture of “The Retirement Gamble” and the diversity of plans, fees, and outcomes, yet its producers chose not to do so. EBRI’s most recent report on job tenure trends was published in the December 2012 EBRI Notes, online here.

(3) As EBRI has repeatedly noted, the idea of holding a full-career job and retiring with the proverbial “gold watch” is a myth for most people. That’s especially true since so few workers even qualify for a traditional pension anymore (see EBRI’s most recent data on pension trends, online here).

(4) EBRI’s Retirement Security Projection Model® (RSPM) finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”).

Ripple Effects

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By Nevin Adams, EBRI

One of my favorite short stories is Ray Bradbury’s “A Sound of Thunder.” The story takes place in the future when, having figured out time travel, mankind has found a way to commercialize it by selling safaris back in time to hunt dinosaurs. Not just random dinosaurs, mind you—cognizant of the potential implications that a change in the past can ripple through and affect future events, the safari organizers take care to target only those that are destined to die in short order of natural causes. Further, participants are cautioned to stay on a special artificial path designed to preclude interaction with the local flora and fauna. Until, of course, one of the hunters panics and stumbles off the path—and the group finds that, upon returning to their own time, subtle (and not so subtle) changes have occurred. Apparently because in leaving the path, the hunter stepped on a butterfly—whose untimely demise, magnified by the passage of time produced changes much larger than one might have expected from its modest beginnings.

The recently released White House budget proposal for 2014 included a plan to raise $9 billion over 10 years by imposing a retirement savings cap for tax-preferred accounts. While initial reports focused on the aggregate dollar limit of $3 million included in the text, it soon became clear that that figure was merely a frame of reference for the real limit: the annual annuity equivalent of that sum, $205,000 per year in 2013 for an individual age 62.¹

Of course, there are a number of variables that influence annuity purchase prices. As an EBRI analysis this week outlines, while $3 million might provide that annual annuity today, if interest/discount rates were to move higher, that limit could be even lower. As the EBRI analysis explains, if you look only as far back as late 2006, based on a time series of annuity purchase prices for males age 65, the actuarial equivalent of the $205,000 threshold could be as low as $2.2 million—and a higher interest rate environment could result in an even lower cap threshold.

At the same time, the passage of time, which normally works to the advantage of younger savers by allowing savings to accumulate, tends to increase the probability that younger workers will reach the inflation-adjusted limits by the time they reach age 65, relative to older workers. The Employee Benefit Research Institute’s Retirement Security Projection Model® (RSPM) allows us to estimate what the potential future impact could be. Utilizing a specific set of assumptions,² EBRI finds that 1.2 percent of those ages 26–35 in the sample would be affected by the adjusted $3 million cap by the time they reach age 65, while 4.2 percent of that group would be affected by the cap of $2.2 million derived from the discount rates in 2006 cited above.

While the EBRI analysis offers a sense of how variables such as time, market returns, and discount rates can have, there are other potential “ripples” we aren’t yet able to consider, such as the potential response of individual savers—and of employers that make decisions about sponsoring these retirement savings programs—to such a change in tax policy.

Like the hunters in Bradbury’s tale, the initial focus is understandably on the here-and-now, how today’s decisions affect things today. However, decisions whose impact can be magnified by the passage of time are generally better informed when they also take into account the full impact³ they might have in the future.

Notes

¹ With the publication of the final budget proposal, we also learned that the calculation of the threshold also includes defined benefit accruals. While our current analysis did not contemplate the inclusion of defined benefit accruals, it seems likely that the number of individuals affected will change. The White House budget proposal is online here.

² The specific assumptions involved taking age adjustments into account in asset allocation, real returns of 6 percent on equity investments, and 3 percent on nonequity investments, 1 percent real wage growth, and no job turnover. This particular analysis was focused on participants in the EBRI/ICI 401(k) database with account balances at the end of 2011 and contributions in that year. The assumptions used in modeling a variety of scenarios is outlined online here.

³ As with all budget proposals, most of the instant analysis focuses on the numbers. The objective in this preliminary analysis was simply to answer the immediate question: How many individuals might be affected by imposing such a cap on retirement savings accounts? Of necessity, it does not yet consider the administrative complexities of implementation and monitoring such a cap, nor does it take into account the potential response of individual savers and their employers to such a change in tax policy—all of which could create additional “ripples” of impact. The latter consideration is of particular importance in considering the implications of tax policy changes to the current voluntary retirement savings system.

Direction-Less?

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By Nevin Adams, EBRI

Generalizations are often misleading, but I think it’s fair to say that some people (specifically among those of the male gender) are notoriously reluctant to ask for directions—even when it’s painfully clear to everyone else traveling in their company that they are “lost.” If you’re not one of those people, I’ll bet you know someone (and probably more than one someone) who is.¹

The rationalizations offered by those refusing to seek help are as varied and variable as the individual circumstances that bring those hesitations to light: a shortage of time; certainty that, however lost they seem, they actually know where they are (or will be shortly); a lack of trust in the reliability of the instructions they might receive; the inconvenience of stopping…this despite the knowledge (frequently even among those reluctant to ask directions) that the modest investment of time to seek assistance will likely be far less than the time (and aggravation) that they will expend trying to find their own way.

When it comes to retirement planning, reluctance to seek help seems even more widespread. In fact, the 2013 Retirement Confidence Survey found that fewer than half of workers surveyed have ever tried to calculate what they need to save for a comfortable retirement (see “Guess Work?”)—and that’s not a new finding in a survey that now spans nearly a quarter-century.

The use of retirement planning “help,” in the form of on-line calculators and professional retirement advisors, has been linked to higher levels of retirement confidence—and with justification, according to new EBRI research.³ Turns out that the respondents to the 2013 Retirement Confidence Survey² in the lowest-income quartile who had sought the input of a financial advisor cited savings goals that, compared with those who did not, would reduce the risk of running short of money in retirement by anywhere from 9 to nearly 13 percentage points, depending on family status and gender. Those in the lowest-income quartile who used calculators chose savings targets that would, if they achieved those goals, decrease their probability of running short of money in retirement by anywhere from 14 to more than 18 percentage points.

Unfortunately, only about one-fourth of the sample studied (25.6 percent) used either of these two methods.

Why, then, have so few sought direction? Doubtless the reasons for not doing so mirror those above: a lack of time, a lack of confidence in the directions, or in the individual providing that assistance. Perhaps in the case of retirement projection calculators, the tools may be too hard to find, too complicated to use, or simply just one thing too much to do in an already too-busy day. This, it seems fair to say, despite the knowledge that seeking help would surely provide a better outcome.

What about those who didn’t seek help, who “guessed” at those retirement savings targets? Well, there were more in that category in the RCS sampling (44.6 percent)—and, perhaps not surprisingly, they tended to underestimate their savings needs—in effect, citing a goal that would leave them short of their projected financial needs in retirement.

Baseball great Yogi Berra once cautioned that “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” When it comes to retirement, the problem generally isn’t getting there—it’s getting there before you are ready.

Notes

¹ These individuals may be harder to spot these days with the widespread availability of GPS devices, but they can still be found.

² See the 2013 RCS, on-line here.

³ “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” on-line here.

Guess Work?

By Nevin Adams, EBRI

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

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

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

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

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

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

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

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

Notes

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

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

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

Confidence Builders

By Nevin Adams, EBRI

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

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

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

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

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

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

Notes

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

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

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

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

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

“Show” Time

By Nevin Adams, EBRI

Adams

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

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

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

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

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

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

EBRI’s Retirement Confidence Survey to be Released March 19

On Tuesday, March 19, 2013, the nonpartisan Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., will release results of the 2013 Retirement Confidence Survey (RCS), the nation’s longest-running and most comprehensive study of the attitudes and behavior of American workers and retirees toward all aspects of saving, retirement planning, and long-term financial security.

This is the 23rd annual RCS and will contain long-term trend data going back to earlier RCS results. Recent waves of the RCS have measured record-low levels of public confidence in the ability to afford retirement.

A teleconfrence briefing for the news media will be held 11:00–11:30 a.m. E.T. TUESDAY, MARCH 19. Reporters wishing to join the conference call or get RCS materials should contact Steve Blakely, EBRI, blakely@ebri.org, 202/775-6341.