Look-Back “Provisions”

Nevin AdamsBy Nevin Adams, EBRI

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 25th 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.

  • Notes

Your organization can be part of the 25th 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 25th 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.

[ii] See “The Status Quo.”

Work “Forces”

Nevin AdamsBy Nevin Adams, EBRI

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.

  • Notes

[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 “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.

“Expected” Values

By Nevin Adams, EBRI

Nevin Adams

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement. Much of that focus has, of course, been driven by concerns that those individuals won’t have enough resources accumulated to fund those retirements. More recently, there has been a sense that one way to help provide a different perspective on these retirement savings would be to provide participants with an estimate of what their current or projected savings would produce in terms of a retirement income stream.

In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.

As noted in a recent EBRI Notes article[i], there appears to be little empirical evidence on the likely impact of such a lifetime income illustration on defined contribution participant behavior. In an attempt to provide some additional evidence with respect to potential defined contribution participant reaction to lifetime income illustrations similar to those proposed by EBSA, EBRI included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator.

Of course, any such projection is necessarily required to make a number of critical assumptions—including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Moreover, the estimates we provided were different in several aspects, notably:

  • Rather than using normal retirement age for the calculation, we asked their expected retirement age.
  • Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
  • Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

What we found was that fewer than 1 in 10 (8 percent) of the defined contribution participants said the monthly amount was much less than expected, though another 1 in 5 (19 percent) said it was somewhat less than expected[ii].

However, more than half (58 percent) thought that the illustrated monthly income was in line with their expectations.

Considering those results, it is perhaps not surprising that the vast majority (81 percent) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17 percent replied that hearing this information would lead them to increase the amount they are contributing. Similarly, the vast majority (89 percent) did not believe this information would impact their expected retirement age.

They may not have been much surprised by the results, but the vast majority of respondents said the retirement income projection was useful; more than 1 in 3 (36 percent) respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful. Moreover, the utility of the projection appeared to transcend the results; 90 percent of those whose illustrated values were lower than expected found the estimates somewhat or very useful, and nearly as many (86 percent) of those whose values were equal to what they expected also found the estimates somewhat or very useful. Even among those who felt the values were higher than expected, 79 percent found the estimates somewhat or very useful.

I’ve heard from several in the industry since the results were released who were surprised – that the survey respondents weren’t surprised. It is, of course, possible (as the article explains) that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations. It could also be that, having given some thought to the subject of savings and retirement over the course of the interview, they had more realistic expectations.

Of course, whether those expectations about living on those amounts in retirement will turn out to be realistic remains to be seen.

  • Notes

[i] The EBRI March 2014 Notes article, “How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey,” is available online here.

[ii] There were some interesting differences by income level; combining the “much less” and “somewhat less” categories, we found that 42 percent of those in the lowest quartile for illustrated monthly income indicated that the value was less than expected, versus only 9 percent of the highest quartile.

 

Security “Blanket”

By Nevin Adams, EBRI

Nevin Adams

“How do they expect to retire on THAT?”

In the several days since the 2014 Retirement Confidence Survey(1)  hit the streets, I think I’ve heard that question more than any other. “That” in this case is the widely cited finding of the survey that 36% of respondents have less than $1,000 (aside from home equity and defined benefit plan) saved – and that’s up from 20 percent in that category in 2009 and 28 percent a year ago(2).

So, how does that group expect to retire?

We can’t know for certain, but there are several things that might offer a better understanding. First, many of those probably AREN’T expecting to retire on that, at least not any time soon; many are young (about half of the 25-34 age group are in this savings range).

Second, they may not be “expecting” to retire; about 16 percent of those with less than $15,000 set aside say they’ll “never” retire, compared with 7 percent of total respondents).

Most of the individuals in this group are, as you might expect, lower-income.  More than 60 percent reported household income of $25,000/year or less.  Little wonder that saving for retirement might be taking a back seat to other matters.

Even if they are expecting to retire some day, they may have concerns about that reality. This group of low/non-savers, for the very most part, had NO retirement account – 80 percent of the 36 percent were in that category. Respondents with no retirement account not only tended to have much lower confidence levels, they were also more likely to think they needed to be saving 50 percent of their current paycheck to achieve a financially comfortable retirement – a perception that might be a reality for this group, based on their reported savings.

Finally, while the trend line for this particular group isn’t encouraging, it’s worth noting that Social Security was cited as a major source of income for nearly two-thirds of the current retiree respondents to the 2014 RCS (as it has been over the history of the RCS), even though current workers tended to have lower expectations for the primacy of Social Security benefits in their retirement income stream. One need only look to the replacement rates that Social Security is projected to provide to appreciate the significance of that program as a retirement income source for many, particularly low- and middle-income workers(3). In fact, a recent EBRI analysis of data from the HRS indicates that Social Security provides more than half the total household income for more than half those ages 65-74, as it does for roughly two-thirds of the households over that age (4).

Indeed, one might well wonder how people expect to live on savings of less than $1,000 in retirement. However, the data suggest that many – already are.

Notes:

(1) The 2014 Retirement Confidence Survey is available here.

(2) The RCS is, of course, a snapshot at a point in time. It’s important to keep in mind that the savings reported are not necessarily what those respondents will have a year from now, or certainly a decade hence. It’s also important that projections about future retirement security consider not just where things stand at a static point in time, but, as EBRI’s Retirement Savings Projection Model (RSPM) does, the impact of future events and changes in behavior.  More information on the RSPM is online here

(3) See “Annual Scheduled Benefit Amounts for Retired Workers With Various Pre-Retirement Earnings Patterns Based on Intermediate Assumptions, Calendar Years 1940-2090.”

(4) See “Income Composition, Income Trends, and Income Shortfalls of Older Households” online here.

”Background” Check

By Nevin Adams, EBRI

Nevin Adams

We’ve never invested in a vacation home, but for a number of years now, my family has made relatively regular trips to Gettysburg, Pennsylvania. And while we’ve visited many places over the years, Gettysburg remains special, both because there are places that we know, and have visited many times, and because there are (still) things to discover. Over time we’ve also shared that experience with friends and members of our extended family, and their participation adds an additional, fresh perspective, even to sites we have visited many times before.

On March 18, EBRI and Greenwald & Associates will release the results of the 24th annual Retirement Confidence Survey (RCS). With a perspective longer than many retirements, it’s likely to garner a lot of attention, as well it should. The focus tends to be on retirement confidence (or the lack thereof), specifically at the extremes—those “very” and “not at all” confident in their prospects for a financially comfortable retirement.

Attention will also likely be given to what can be done to improve the levels of confidence. Previous iterations point to some consistent factors: having more retirement savings is perhaps the most obvious connection to retirement confidence, as is participation in a workplace retirement savings plan (which, as you might expect, is linked to having more retirement savings). The RCS has also found that something as fundamental as having taken the time to do a calculation of retirement needs has a positive effect on confidence, even though those who had done such an assessment tend to set higher savings goals.

For this year’s RCS, as we do every year, we make it a point to ask a battery of consistent questions, to develop trend lines that allow us to see how attitudes change over time, throughout a wide variety of market and regulatory cycles, not to mention the advent of transformative technologies such as the Internet. Of course, we also include certain topical questions to get a current sense of worker—and retiree—responses to things such as prospective tax law changes, plan design features like automatic enrollment and contribution acceleration, and the use of various technologies in retirement planning. We’ve asked not only how much they have saved, but how much they think they should have saved, and—more recently—how much they think they should be saving now to provide that financially secure retirement.

Perhaps most importantly, we pose those questions to both current workers and current retirees, so as to gain a unique and informative perspective on the realities of retirement from those already living it, alongside the expectations of those for whom retirement remains a future event.

There’s a particular spot on the Gettysburg battlefield where we always try to take a family picture—the background doesn’t change, but it’s interesting to watch how much we’ve changed over the years.

Similarly, the RCS provides an invaluable and consistent background—along with a fresh and interesting perspective of today’s environment, as well as insights on future trends—that can help us all better prepare for a more financially secure retirement.

Note: The results of the 2014 Retirement Confidence Survey (RCS) will be available at 8 a.m. ET on Tuesday, March 18, at www.ebri.org.  Information and findings from prior surveys are available at www.ebri.org/surveys/rcs.

“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).