“After” Math

By Nevin Adams, EBRI

Adams

Last week, EBRI Research Director Jack VanDerhei(1) testified before the House Ways & Means Committee on the subject of “Tax Reform and Tax-Favored Retirement Accounts”, a hearing described as considering “…the current menu of options for retirement savings—both with respect to employer-based defined contribution plans and with respect to IRAs.” According to Committee Chairman David Camp (R-MI), the hearing was to “…explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.”

That hearing preceded by just a day Senate Budget Committee Chairman Kent Conrad’s (D-ND) unveiling of his Fiscal Commission Budget Plan (see link here).  That plan(2) referenced the original Bowles-Simpson Fiscal Commission’s “Illustrative” Tax Reform option under which the exclusion for employment-based health insurance would be eliminated, capping its value for five years and then phasing it out over 20 years, while retirement savings accounts would be consolidated, with a cap on tax-preferred contributions.(3)

While the prospects for actual legislation ahead of the November election seem unlikely, it is clear that concerns about the nation’s budget deficit will keep tax reform—and the tax status of workplace benefit programs—front-and-center in the weeks and months to come.

Appropriately enough, next month EBRI will host its 70th policy forum, titled “’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” At this semi-annual policy forum, panels of experts will deal with a variety of pertinent and timely issues, including the potential impact of changes to current tax incentives for employee benefits, and the “true cost” of tax deferrals.

We’ll also talk about what 401(k)/defined contribution plans are delivering, and what individuals actually do after retirement with respect to their retirement savings, as well as optimal approaches on retirement income designs for defined contribution plans. We’ll even look around the globe for some potential lessons to be drawn from international comparisons.

It’s a day of information, interaction, and networking that you won’t want to miss.

However, seats are limited—reserve your place today. You can’t afford not to.

A copy of the full policy forum agenda, and registration information is online here.

Endnotes

1) A copy of Jack VanDerhei’s written testimony for the House Ways & Means Committee is available online here.

Video of the testimony is available in two sections, online here.

Additional information regarding the Ways & Means hearing is available online here.

2) See page 11, online here.

3) Last year an EBRI Notes article (July 2011, online  here)  analyzed the potential impact of those kind of changes on retirement savings.

Titanic Proportions

By Nevin Adams, EBRI

Adams

This weekend marks the 100th anniversary of the sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner. Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden—and only—voyage, it carried 2,244 people, 1,514 of whom would perish as a result of a decision to carry only enough lifeboats to accommodate about half those on board. Despite that, the tale of Titanic’s closing hours is generally one of an orderly, “women and children first” evacuation, with the band playing on while passengers stood in line and waited their turn.

In an NPR report this week titled “Why Didn’t Passengers Panic on the Titanic?” David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that also sunk at about the same time. Both involved luxury liners, both had a similar number of passengers and a similar number of survivors. But on the Lusitania, passengers panicked—and the survivors were mostly those who were able to swim and get into the lifeboats. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.”

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the importance of starting to save early, establishing a plan, and having a goal all fit within the moral of that example: Act while you have time, as you may not always have all the time you need, or the resources to take advantage of it. But what kind of time do Americans have?

The concept of measuring retirement security—or retirement income adequacy—is an extremely important topic, and EBRI has been working with this type of measurement since the late 1990s. When we modeled the Baby Boomers and Gen Xers in 2012, approximately 44 percent of those households were projected to have inadequate retirement income for basic retirement expenses plus uninsured health care costs; so the glass is more than half full, but just a bit. That’s a big percentage, but it’s still an improvement of 5‐8 percentage points over what we found in 2003, when the glass was, indeed, half empty. The improvement occurred despite the impact of the 2008 financial crisis, and the subsequent “great recession.”

In part, that is because the passage of time allowed more funds to be saved, but that improvement is largely due to the fact that in 2003 very few 401(k) sponsors had automatic enrollment (AE) provisions in place, and participation rates among the lower-income workers (those most likely to be at risk) was quite low. However, with the uptick in adoption of AE the past few years after passage of the Pension Protection Act (PPA), participation rates have often increased to the high 80 or low 90 percent—and that stands to make a big difference in shoring up the retirement financial security of many of those who need it the most. In fact, EBRI simulation results show that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a plan design relying on voluntary enrollment, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent.

The tragic loss of life on the Titanic is generally attributed to a shortage of lifeboats, while on the Lusitania, it was the lack of time to get people into the lifeboats available. For many of those looking ahead to retirement, plan design changes such as automatic enrollment and contribution acceleration look to be a real retirement life-saver, as they encourage both early action and the effective use of time.

Notes

While the lack of retirement income adequacy for the lowest-income households is a matter of concern, so is the rate at which they will run “short” of money during retirement. Indeed, as documented in our July 2010 Issue Brief (“The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects”), 41 percent of early boomers in the lowest income quartile could run short of money within 10 years after they retire.

More information is included in recent testimony by Jack VanDerhei, EBRI research director, before the Senate Banking Committee, on “Retirement (In)security: Examining the Retirement Savings Deficit” (T-171), available online here.

“Generation” Gaps

By Nevin Adams, EBRI

Adams

If you think it’s complicated trying to determine an individual’s retirement funding needs, imagine trying to do so for all American workers. That was the topic of a Senate Banking subcommittee hearing last week titled “Retirement (In)security: Examining the Retirement Savings Deficit,” at which EBRI Research Director Jack VanDerhei was asked to testify.(1)

When EBRI modeled the retirement savings gap of Baby Boomers and Gen Xers earlier this year, we found that between 43 and 44 percent of the households were projected to be at risk of not having adequate retirement income for BASIC retirement expenses plus uninsured health care costs—though that was 5–8 percentage points LOWER than what we found in 2003. That’s right: In terms of that retirement savings gap, American households are better off today than they were nine years ago—even after the financial and real estate market crises in 2008 and 2009.

Measuring retirement income adequacy is an extremely important and complex topic, and one that EBRI started to provide back as far as the late 1990s. Our recent projections indicate that the average individual deficit number (for those with a deficit) ranges from approximately:

• $70,000 for families, to

• $95,000 for single males, to

• $105,000 for single females.

Stated in aggregate terms, that would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. That’s a large number, to be sure, but still considerably smaller than some of the projections that have been put forth.

Here are four things that are sometimes overlooked that help explain the “gaps” in retirement projection gaps:

Some won’t have a retirement

The reality is that some people won’t make it to retirement. On an individual level, we may not know who they are, but in the aggregate we can project the impact with some precision.

You can’t ignore the impact of uniquely post-retirement expenditures.

Health care costs—and post-retirement health care costs particularly—remain a potential source of underplanning, both for retirement and retirement projections. The reality is that we spend differently in retirement than we do before retirement. Moreover, the costs of care, and particularly care such as nursing home and/or long-term care, loom large. And many won’t think or insure for that risk until it’s too late.

Tomorrow’s retirement will be funded differently.

Looking back, even only a few years, assuming that the income sources of current retirees will be available to future retirees glosses over the reality that a major shift in emphasis in retirement plan design has taken place. In the future, the proportion of retirees receiving traditional pension income will almost certainly decline, and the percentage relying on defined contribution savings (primarily 401(k)-type plans) as a primary source of post-retirement income is certain to increase. Projecting future retirement income flows based on the experience of today’s retirees is certain to miss the mark.

We’re already saving “better.”

Thanks to the growing popularity of automatic plan design trends—automatic deferrals, contribution acceleration, qualified default investment alternatives—many of today’s retirement plan participants are already saving earlier and investing more age-appropriately than ever before. There’s no reason to assume these trends won’t continue to extend and expand going forward. Projections based on pre-Pension Protection Act defined contribution trends are relying on yesterday’s news.

Endnote

(1) Video of the hearing is available online here.

Dr. VanDerhei’s testimony is available online here.

“Good” Vibrations

By Nevin Adams, EBRI

Adams

Last week the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., unveiled the 22^nd annual Retirement Confidence Survey (RCS).

Among the things we have learned after doing this survey for more than two decades: People’s confidence about retirement frequently seems out of line with the financial resources they indicate they have on hand to fund it. Of course, most (56%) of this year’s respondents admit neither they nor their spouse have made even a single attempt to determine how much they need to achieve that comfortable retirement—so it shouldn’t be too surprising that, asked how much they think they need to have saved in order to provide for a comfortable retirement, many hold forth a number that seems lower than some might expect.

While we spent a fair amount of time this week discussing the results with reporters, one question that came up repeatedly was “Why do you do this survey?  What do you hope people take from it?”

The survey itself is meaningful both for the kinds of issues it deals with and the trends it measures: Questions that, as in this year’s RCS, deal not just with confidence as a “feeling” but also the criteria that underlie and influence that sentiment. It looks at the perspective both of those already in retirement, as well as those still working and heading toward that milestone. It also (with a perspective based on two decades of conducting this particular survey) offers insights on how those feelings and factors have changed over time.

Those good reasons notwithstanding, this past week EBRI reminded reporters that the RCS has found that people who have taken the time to do a retirement needs assessment are generally more confident than those who haven’t done so, and not necessarily because they find that they are in better shape than they’d thought. In fact, most report that they set higher savings goals AFTER they had done the assessment—and were THEN more confident in their situation. That is why EBRI joined many others in 1995 to establish the American Savings Education Council (ASEC), and then the ChoosetoSave^® program and the BallparkE$timate.^®  Millions of Americans have used the BallparkE$timate^® at www.choosetosave.org to help them climb the hill to savings and greater financial security, and—according to the RCS—a more realistic view of the future.

There’s something to be said for knowing the size and extent of what was previously unknown, particularly when it comes to setting a financial goal as complex as planning for retirement can seem.

If the annual publication of the RCS does no more than remind individuals of the importance of taking the time to do so, then it’s not only good information—it’s information that does some good.

Full results of the 2012 Retirement Confidence Survey (RCS), along with the press release and seven related RCS Fact Sheets,  are now available online here. 

The 2012 RCS:Job Insecurity, Debt Weigh on Retirement Confidence, Savings

Americans’ confidence in their ability to afford a comfortable retirement is stagnant at historically low levels in the face of more immediate financial concerns about job uncertainty and debt, according to the 22^nd annual Retirement Confidence Survey (RCS), the longest-running annual survey of its kind in the nation.

Asked to name the most pressing financial issue facing Americans today, both workers and retirees were more likely to identify job uncertainty. “Americans’ retirement confidence has plateaued at the lowest levels we’ve seen in two decades of conducting this survey,” said Jack VanDerhei, EBRI research director and co-author of the report.

Many workers report they have virtually no savings and investments, and workers’ expected age of retirement continues to rise, according to the RCS. However, one area in which Americans are saving for retirement is an employer-sponsored retirement savings plan, such as a 401(k). In fact, 81 percent of eligible workers (38 percent of all workers) say they contribute to such a plan with their current employer, according to the RCS.

These and other findings are contained in the 22^nd annual RCS, conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc. Full results of the 2012 RCS are published in the March 2012 EBRI Issue Brief, released today and online at www.ebri.org 

The EBRI website also has several RCS-related fact sheets, online here. 

The EBRI press release is online here.

“Difference” Strokes

By Nevin Adams, EBRI

Adams

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

However, the timing of the retirement decision is often not within an individual’s control. In fact, the Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned. In fact, nearly half (45 percent) of retirees reported that they were in this situation in 2011 (see EBRI Issue Brief No. 355, March 2011, “The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting ’the New Normal.’”

Real-world data have shown (and shown for some time now) that the median retirement age for Americans is not even as old as 65 (it’s been 62). Still, EBRI research has shown that working longer—even working past the age of 65—is no guarantee of a financially comfortable retirement.

In fact, a June 2011 EBRI Issue Brief titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy” notes that, even if a worker delays his or her retirement until age 80, just 61.7% of the lowest preretirement income quartile households would have a 50 percent probability of not running out of money in retirement.

What Matters

The research notes that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and whether they save in a defined contribution retirement plan during their working lifetime. In fact, the report notes that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.” How much difference? At least a 10 percentage point difference in the majority of the retirement age/income combinations.

Ultimately, the research should remind us of a couple of things: First, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption. Second, and more important, even if that assumption pans out, it cannot be assumed that it will, in and of itself, prove to be sufficient.

But finally, and significantly, there is at least one thing individuals can exercise some control over in the “here and now”: their current—and continued—participation in a defined contribution plan.

And that’s something that can directly—and significantly—make a difference in building a financially viable retirement.

Endnote

(1) Admittedly, except for those in the lowest- income quartile, this would be a small percentage of the population, depending on your expectations of success (see “Short” Comings). Still, according to the EBRI Retirement Security Projection Model (RSPM) baseline results, the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success.

You can read more about how these factors impact retirement income adequacy online here.

Goals Tending

By Nevin Adams, EBRI

Adams

The bad news is that times are still tough for many Americans—and surveys suggest that even those with jobs are nervous about their prospects for the future. The good news is that the current level of economic uncertainty seems to have brought about—at least for some—a heightened awareness of the need to set money aside for a rainy day, perhaps even those rainy days in retirement.

That said, the weak economy has certainly constrained the ability of many to save. In fact, a recent national survey found that an increasing number of Americans are having difficulty saving to meet goals ranging from meeting emergencies to affording retirement. The survey—released as part of America Saves Week(1)—noted that over the past three years, there has been a decline in the number of people who spend less than their income and save the difference, are building home equity, have adequate emergency savings, and think they are saving enough for retirement.

However, the survey also revealed that having a savings plan has beneficial financial effects, even for lower-income families. Consider that 85% of those who had a savings plan spent less than their income, (86% of this group felt they had sufficient emergency savings), and 3 in 4 said they were saving enough for retirement.

On the other hand, just 44% of those without a savings plan claimed to be spending less than their income, while 43% said they had sufficient emergency savings. Fewer than 1 in 4 of those with no savings plan said they were saving enough for retirement.

And yet, while those with a plan for savings had significantly better savings behaviors, fewer than half of survey respondents said they had “a savings plan with specific goals.”

It is admittedly simplistic to chasten those truly unable to save because of challenging economic circumstances. On the other hand, there are surely some today better able to weather those economic storms because they chose to set money aside during less tumultuous times.

That first step on that path, and it’s a critical one, is to Choose to Save.®  As America Saves Week reminds us—and those trying to help others save—there’s no better time to start on that path to Save For Your Future® than today.

Note: Organizations interested in building/reinforcing a workplace savings campaign can find free resources—and a handy schedule of events around which to construct a program—courtesy of the American Savings Education Council (ASEC).

Endnotes

(1) 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. America Saves Week is managed by the Consumer Federation of America (CFA), and the American Savings Education Council (ASEC). ASEC is a program of the Employee Benefit Research Institute (EBRI), which commissioned the survey, undertaken by Opinion Research Corp. You can find out more about America Saves Week.

(2) 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.

“Short” Comings

By Nevin Adams, EBRI

Adams

In this business you are frequently asked “how much should people save for retirement?” Some try to answer that question with a degree of specificity that can be somewhat simplistic.

Let’s face it, even if those close enough to retirement to have a sense of what their pre-retirement income level is (and, flawed as that can be, most projections start from that assumption as a baseline for what you’ll want/need to spend in retirement—see “Replacement” Window), most struggle to turn that into a real savings figure.

Ultimately, of course, a reliable answer to that retirement savings question requires an understanding of the individual’s goals and/or financial needs—and, predicated on certain assumptions, there are any number of tools that can help individuals set a target and (based on that) establish a savings plan.

However, the planning question that almost never gets asked is: “And how certain do you want to be of achieving that target?”

Asked that question, I suspect most individuals would respond, “100%.” Unfortunately, much of the modeling that is being used to help individuals set those targets is based on averages: things such as average life expectancy, average investment experience, and—in the really in-depth models—average health care expenditures in retirement.(1) As a result, those models (useful as they might be in terms of framing a planning discussion) produce a result that will fall short…50% of the time.

In fairness, some of those shortfalls could be small. After all, if you’re a dollar short, you’re still short a dollar. But in some cases those shortfalls could be larger—much larger, in fact.(2)

And that’s a fact worth keeping in mind.

Endnotes

(1) For more information on these kinds of projections—and EBRI’s Retirement Readiness Rating—see the July 2010 EBRI Issue Brief, no. 344.

(2) For a more detailed discussion about those projected shortfalls—and how they can vary according to such factors as gender, marital status, and income levels—see the October 2010 EBRI Notes, Vol. 31, no. 10.

Older Americans Remaining in the Work Force

The percentage of older Americans (ages 55 or older) in the work force remained at its recent highs in 2011, according to a new report by EBRI.

The EBRI report, which examines the rates at which older workers participated in the work force before, during, and after the recent economic recession, finds that the labor-force participation rate for those age 55 and older has remained above its level before the economic downturn.

Specifically, the percentage of civilian noninstitutionalized Americans near or at retirement age (age 55 or older) has been rising steadily since 1993, when it stood at 29.4 percent, reaching 40.2 percent in 2010 (it remained at that level in 2011).

The EBRI analysis finds that for those ages 55–64, this trend is almost exclusively due to the increase of women in the work force; the male workforce participation rate is flat to declining.

The EBRI report notes that some older workers continue in the labor force because they want to remain involved, but many others work because they need to.

“This upward trend is not surprising and is likely to continue. Many workers continue to need access to employment-based health insurance, as well as more earning years to save for retirement,” said EBRI’s Craig Copeland, author of the report.

The press release is online here. The full report is published in the February 2012 EBRI Notes,  online here.

Above “Average”

By Nevin Adams

Nevin Adams, EBRI

Every so often an industry survey will come out with an “average” 401(k) balance.(1) The specific numbers vary, but they are consistently less than even the most optimistic would see as sufficient to provide a financially viable retirement.

Now, in fairness, the validity of an “average,” while mathematically simple, depends heavily on its components. Most are no more than the total of all the balances of those in a 401(k), from those just entering the workforce (and thus, by definition, with negligible balances)—and with decades to go to retirement—to those who are perhaps just days away from that point. Looking at no more than the “average,” you can’t tell how many are in which category. So, while the average can, over time, provide a sense of the direction in which things are moving, it tells you very little about the adequacy of the overall average savings to fund an individual retirement.

One way to help provide a more meaningful measure is to segment those balances by specific age demographics. In fact, the EBRI/ICI 401(k) database has long provided not only an average 401(k) balance, but also totals for different groups. To give you a sense of the difference that can make, at year-end 2010, while the total average 401(k) balance was $60,329, the average 401(k) balance for those in their 60s—at least for those with 20 years of tenure—was $159,654.

In fairness, $159,654 may not look like very much to have saved by someone in their 60s. But even then, there are many things we don’t know about that person’s individual circumstances. We don’t know if they have a defined benefit pension, for one thing, nor do we know if they have savings outside their workplace. Perhaps just as significantly, we don’t know if that average takes into account their accumulated savings in all defined contribution plans, including those savings that might have been left with previous employers or rolled into individual retirement accounts (IRAs) along the way.

In testimony before the Senate Finance Committee last fall,(2) EBRI Research Director Jack VanDerhei noted that “[p]articipation in a retirement plan through current employment at a specific moment in time does not tell the full story of a worker’s preparedness for retirement or the availability of some form of retirement income from an employment-based retirement plan.” He went on to caution:

“Unfortunately, the ‘success’ of these plans is sometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income. For example, some analysts will merely report the average balance in defined contribution plans (most commonly the 401(k) subset of this universe) and attempt to assess the value of these plans by determining the amount of annual income that this lump sum amount could be converted to at retirement age. Of course, this concept does not adjust for the fact that the vast majority of 401(k) participants are years, if not decades, away from retirement age. Moreover, even if one does look at the average balances for workers near retirement age, it is obviously not correct to look only at the 401(k) balance with the employee’s current employer. For example, an employee age 60 may have very recently changed jobs and rolled over a substantial account balance from his previous employer to an IRA.”

Sure enough, as I sit here today, I have three separate 401(k) accounts at three separate employers, a rollover IRA, and a SEP.

Anyone trying to glean a sense of my retirement prospects while looking only at my current 401(k) balance surely wouldn’t feel very optimistic.

But then, they’d only be looking at part of the picture.

Endnotes

(1) Including EBRI, in its annual updates of the EBRI/ICI 401(k) database, in cooperation with the Investment Company Institute—see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010.”

(2) A copy of the testimony is available online here. See also “Tax Reform Options: Promoting Retirement Security” online here.