The following is the first half of an excerpt of the transcript of the live webinar Brian Perlman, PhD. provided in April, 2013 as part of the Retirement Resource Center’s Professional Development Program. The second half was published in the October, 2013 issue of Retirement InSight and Trends. Brian’s comments have been edited for clarity and length.
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Read the second half of this transcript as published in the October, 2013 issue of Retirement InSight and Trends.
Today’s economic and investing environment requires that our early, mid, and late career clients assume an ever-increasing responsibility for their retirement income and expenses. As retirement professionals, we need to understand and recognize the positive as well as the counterproductive retirement preparedness behaviors of our clients. And as retirement professionals, we know that money behaviors can prevent the preparation for retirement or torpedo an established retirement plan.
The Retirement Confidence Survey was started in 1993 and is the longest-running annual retirement survey of its kind in the nation. Sponsored by the Employee Benefit Research Institute, otherwise known as EBRI, the American Savings Education Council, otherwise known as ASEC, and Matthew Greenwald & Associates, the annual Retirement Confidence Survey is a random, nationally representative survey of 1,000 individuals age 25 or over.
I’m looking forward to gaining insight into the results of this year’s survey that will help us better understand and anticipate our current and future clients’ retirement planning behaviors, as well as help us understand what clients expect and are looking for when they receive investment advice. Brian will help you gain insight into the psychological and financial retirement readiness of American workers, what their expectations are for retirement. And it’s just fascinating to see what they think they’re going to get for retirement income, what they’re doing to provide that retirement income, and to get insight into what their concerns are.
This is the 23rd annual measure of worker and retiree confidence about retirement or, I’d like to say, lack thereof. We’ve actually been doing it for 20 years with EBRI. The study involves 1,254 20-minute telephone interviews conducted in January of 2013. We talked to people ages 25 and over. We have a version for workers, and we also have a separate version for retirees.
We follow a very rigorous methodology that the data is weighted by age, sex, and education to match the census, and the margin of error is four points for all workers and seven percentage points for retirees.
Just keep in mind that when we look at some of this data, it may not add up to 100 percent due to rounding of the subsamples.
The State of Retirement Confidence in 2013
Now to start with, retirement confidence is slowly declining despite brightening economic indicators. What we’re seeing is that since we had the financial crisis back in 2008-2009, there’s been a pretty substantial drop, and that drop continues now to creep along.
One reason for that might be that workers may be becoming increasingly aware of what they really need to have for a financially comfortable retirement. I also think we’ve had a lot of discussion about entitlements lately, and I think some of this might be driven by people’s concern about the future of Social Security and what it’s going to provide for them.
Generally speaking, what we’ve also learned is that savings are generally low, but they’re holding steady. But as you’ll see throughout the presentation, they’re holding steady at pretty much a woefully inadequate level.
We are also seeing that workers with incomes less than $35,000 are increasingly unlikely to save. And when I say unlikely to save, we mean unlikely to save anything. You’ll see a pretty dramatic jump in that as well.
A lot of people say “With the cost of living, I just can’t afford to do more.” That’s an issue we’ve explored for a number of years, but when you really push people, they can come up with some more money. Not a lot, but some more. But nonetheless, that’s part of the reason they give for not saving.
What’s also interesting is that we’re seeing that people might save more if they were automatically enrolled in a defined contribution plan. In fact, we’ve seen some people saying they would do that at levels of 6 percent, which is almost contradictory in the sense that they can’t afford to save more, yet they’re receptive to the idea of having the 6 percent automatic enrollment in their 401(k) plan.
The primary ways that workers plan to make up for the savings gap is to work longer and work in retirement, and that’s nice, except you’re going to see a gap between what workers intend to do and what retirees actually do in this area, which is a very stark comparison.
We also learned that despite low levels of savings, most workers think that some form of personal savings will provide a major source of income in retirement, and we’re seeing that this is more the case for workers than retirees. What’s interesting here is since we’ve been doing the retirement confidence study – I’ve been researching this issue myself since 1990 or 1989, and workers always think that their own personal savings are going to be a big source of income in retirement. In fact, often you see them say it’s going to be a bigger source than Social Security.
Of course, as they approach retirement over the last 30 and 40 years, that’s never been the case.
Although a few obtained investment advice, many would like more information about converting savings to income at retirement. And I think as we get into our recommendations and takeaways, you’ll see that this is an important piece of data for us to pay attention to.
Declining Retirement Confidence
Let’s start with the issue of declining retirement confidence. We asked people about how confident they are about the ability to have enough money to live comfortably in the retirement years. We’re seeing an increase in the people who are saying that they’re not at all confident, and that’s kind of a shift that, as I mentioned, started really dramatically back when we hit the housing crisis. But it has still been eroding, and what you’re seeing is a pretty high percentage of people who are saying that they’re not too or not at all confident about their ability to live comfortably in retirement.
What we see is that roughly four in 10 workers believe that they need to save 20 percent or more of their income to live comfortably in retirement. That’s a lot of money to save. Forty-three percent of people think they need to save 20 percent or more to live comfortably in retirement.
When you throw in the fact that 23 percent don’t know, what you see is that a significant majority of people are saying they’re going to have to save a significant amount of money in order to have a successful retirement.
We also know that retirement confidence is inversely related to the percentage of income workers think they need to save. And as you can see, those that are not at all confident at 45 years and older feel they need to save a great deal of money, almost an impossible amount, to live comfortably through retirement.
So people are somewhat pessimistic about this, or at least they’re setting goals that are pretty high. And considering, as I’ve mentioned, that a lot of them don’t feel they can afford to save more, it leads you to conclude that a lot of people are more realistic about the challenges they’re facing.
We also know that six in 10 workers report a problem with debt. Sixteen percent today say it’s a major problem. So debt also factors in. Needless to say, that debt is more prominent among the low-income workers, but it’s also a factor that makes people concerned about having a secure retirement.
We also see there has been an ongoing increase in the percentage of workers who are not at all confident about having enough money for basic expenses in retirement. Now this is the baseline measure of what we like to call food and shelter and the ability to just survive, and what we’re seeing is that 29 percent today say that they don’t have enough money to take care of their basic expenses.
Back in the mid-1990s, that number was only about 12 percent. It really spiked again when we had the financial crisis, but it’s still gradually increasing over time, which is a cause for concern.
We also see that workers are less confident about paying for medical expenses in retirement. And there, too, we’re seeing a pretty dramatic change since 2007 where now we have 52 percent who are not too or not at all confident about the ability to pay for medical expenses in retirement and that continues to decline.
On a related note, the percentage of workers not at all confident about paying for long-term care has also reached an all-time high, and we’re seeing that at 62 percent. The “not at alls” have been the fastest-growing segment, and that’s gone from 21 percent in 2007 to 39 percent in 2013. That’s a fairly dramatic and ongoing increase in people who are not at all confident about being able to pay for long-term care.
Again, it’s symptomatic of what we’re seeing throughout when it comes to confidence.
We also see that more workers are not at all confident about the future of Social Security, and that’s gone from about 34 percent back in 2007 to 41 percent today. But we also see that there’s been a pretty big spike in this past year, and my theory is that some of that has to do with the discussions going on in Washington and the election and the budget talks and people talking about the challenges the government’s going to have in paying for entitlements.
On a related note, workers are also more concerned about future Medicare benefits. Again, if you look at the “not at all confidents,” we see a big spike in the last year, and I feel that that’s for the same reasons we saw issues in Social Security. We can all remember when Romney and Obama were running against each other, the back and forth about Medicare and about the insolvency and the difficulty and the challenges, and certainly even Paul Ryan talked about the budget and that Medicare’s going to go insolvent. I think that there has been a growing awareness of the challenges that the system is going to face.
Savings for retirement is steady but low. First of all, we see that it has been pretty constant about workers calculating retirement needs. It’s up slightly this year, and despite the fact that confidence has come down, we’ve seen a slight increase in the percentage of workers who have tried to figure out if they’ve saved enough. But that’s been pretty steady over the years.
When we ask workers what they need to accumulate to have a comfortable retirement, we’re seeing about 29 percent or close to 30 percent saying under $250,000. We have half saying under half a million dollars.
Now, as some of you or a lot of you in the audience realize, this is not a lot of money to make it over what could be 20 or 30 more years in retirement. We know that $1 million might produce roughly 40-something thousand dollars, I think, depending on which Monte Carlo analysis you perform. But that also doesn’t take inflation into account.
When you look at these numbers and you look at someone thinking that $250,000 is going to be enough, that’s going to produce like $10,000 a year, which is going to shrink in value due to inflation. Nonetheless, this is what people actually think that they need to have a comfortable retirement. And it’s kind of scary when you put two and two together and you think about the fact that a lot of people are not that confident in their ability to have a secure retirement, and yet at the same time, they’re setting goals that are much lower than they actually need to achieve to have a secure retirement.
We did ask workers how they determined what they needed to have a secure retirement, and what you can see is that certainly the people who did not do a calculation guessed. And only 12 percent of those who did the calculation said they guessed.
We did see a number of people who did their own estimate, and in many cases it was a back-of-the-hand kind of estimate. In a number of cases, a lot of people actually did a fairly informal estimate. So the people who say that they tried to calculate, in many cases it’s not a really solid calculation that was done, and in fact many people do a much more informal calculation.
Roughly eight in 10 workers are confident that the specified amounts that they mentioned would provide them with a comfortable lifestyle in retirement. Most of them are somewhat confident. And I should say we’ve done a lot of research where we see that workers don’t have a really good ability to understand how a pool of money will be annuitized over the years. And so what ends up happening is they tend to think, in research we have done, that the money will go about twice as far as it really does.
So people don’t have a really good ability to understand how a pool of money will generate an income.
There has been a severe decline in retirement among lower-income workers, and what we’re seeing is that only 24 percent of households with less than $35,000 of income say they have saved any money for retirement. It goes up dramatically as the income goes up, but certainly there is a lower-income segment in our population, the majority of who really do nothing to prepare for retirement.
And this segment has been growing over the years, in fact quite dramatically in the last four years. We went from 49 percent who said they have saved something for retirement to only 24 percent today who say they have done that.
Total worker savings has not changed that much over the years, but what we’re seeing is that the savings is also very low. We’re seeing that 88 percent have $250,000 of savings or less saved up for retirement, and those numbers have been pretty steady. And when you look back at what people said they thought they’d need to save for retirement and you look at what they’re saving now, you reach the conclusion that even though workers set low goals for themselves, they don’t meet those goals. They even save less than the goals that they set for themselves.
Now, one note about this data; one can argue that the previous question asked how much do you need to have by the time you retire, and a lot of these people are not retired yet. But what we’ve seen is the differences between younger and older workers and what they’ve accumulated; the older workers do save more, but the difference is not that great.
So, overall, what we see is that people set the bar low and then fail to clear, in many cases, the bar they set for themselves.
Most investors are at least somewhat confident that they are investing wisely. Again, throughout this research, the “somewhat confident,” it is always hard to interpret what they mean by that. We’ve done other research publicly released that suggested that most workers don’t really know how to invest very well or don’t know how to do asset allocations well and don’t really feel they know what to invest in, but that they have some level of confidence because their employer provides them a lot of choices and they have confidence that those choices are good choices.
But we do see in other research that people don’t really have a good sense of how to invest. But nonetheless, 85 percent are either very or somewhat confident that they do.
The cost of living is the predominant reason workers don’t contribute more to their retirement plans. Basically they feel they have to pay for everyday expenses and also that that by far overcomes or outpaces any other reason why they can’t. Nonetheless, when we ask them, six in 10 workers, including half of non-savers, said they could save more for retirement back in 2011, and they basically said that they could save $25 a week by cutting back on dining out or entertainment and leisure in particular.
So most people think it’s possible for them to do more despite the fact that they’re saying living expenses are preventing them from doing so.
Most of those who are not offered a DC plan would continue contribution even if 6 percent were withheld through auto enrollment. So what we’re seeing is that there’s a willingness to have auto enrollment, and this somewhat contradicts what we saw earlier, people saying that they can’t afford to save more. Yet if the employer had a 6 percent auto enrollment, most of them would take advantage of it and most of them would still use it. So there is some contradiction there.
Age of Retirement Expectations
The next section talks about expectations about retirement, whether it’s realistic or not. And what we’re seeing is that the age at which workers expect to retire has increased steadily since 1991. We’re seeing that more and more people plan to retire at 70 or older. It hasn’t been a big change between last year’s study and this study, but if you go back to the 1990s, the change is huge.
I remember back in the 1990s, we did see a lot of people feeling they could they retire in their early 60s, and now we’re seeing a shift towards more and more people believing that they won’t be able to retire until their late 60s or 70 or older, or never retire.
And I see a lot of this in focus groups. I see a lot of people saying that because of the uncertainties of the stock market, because of the uncertainties of entitlements, because it’s so much harder these days, and because of the low interest rate environments, we see a lot of workers who thought they were going to retire, in focus groups I do, all of a sudden saying “Well, at one time I did think I was going to retire earlier, but now I don’t.” So that’s been a pretty common occurrence.
More than one-third of workers expect to retire after age 65, but only one in seven retiree workers actually do. So what we’re seeing is that while workers plan to work longer, the plans don’t always materialize. They don’t always work as long as they thought they would. And what we’re seeing is that very few workers retire later than they plan.
Now, these are small samples, by the way. I should say that this only has a sample of 251, so a lot of this fluctuation is sort of sampling error that goes on. What we pretty much see over the years is that there’s sort of an even split between those who retired earlier than they planned and those that retired about when they planned, and roughly a plurality of people do retire earlier than they planned to.
When we asked them why they retired earlier than they planned to, we see that many of them retired for reasons that are beyond their control. The biggest reason is that they had some sort of health problem or disability problem. By the way, on this question you could give multiple reasons. So we asked people who retired earlier than they planned to why they did, and that was the biggest reason.
But the other interesting thing is even the people who said that “I wanted to retire; it’s something that I thought I could do and felt I wanted to do,” they gave multiple responses. And it was only about 8 percent who were really pure, “I did it because I wanted to.” Even the ones who said, “I did it because I wanted to,” gave a second or third reason, which suggests that there were other issues.
It is a real issue for retirement security. We see a lot of people who have realized, if you put all this together, that they have fallen behind the eight-ball, realized that retirement is harder than it was in the past, realized it’s a hard thing to do, and feel like “Okay, well one of the solutions is I’ll keep working through retirement.”
Yet if we follow the trends of what happens to people as they approach retirement age, a lot of them can’t do it and don’t end up doing it. That the workers are much more likely to think they will work in retirement than retirees actually work.
This really starkly makes the point that 69 percent of workers say that they’re going to work in retirement, but only 25 percent of retirees actually do. And this matches what we see in the census, the current population survey, the U.S. Census, which suggests that for people in their 60s in retirement, that employment income really makes up 20 to 25 percent of their income and the rest comes from other sources.
And keep in mind that even when you have this, that as people go beyond their 60s, the percentage of people who work in retirement drops dramatically. So even if they start working in retirement, it’s not something that many people keep doing.
And so it’s very illusory for people to think that they’re going to bail themselves out by working longer in retirement.
More than half of workers expect spending in retirement will be lower than immediately before. We don’t see a big shift. We don’t see that much of a contrast between workers and retirees on this one. We see more workers saying it will be a little lower than retirees, but for the most part, the differences are not that great.
And so at least in this area, workers have somewhat of unreasonable expectations. And, in fact, when people retire they actually are less likely to say it’s going to be lower.
When we look at how they compare with retirees, workers are more likely to plan to rely on personal savings for income in retirement, and this is really striking. Thirty-three percent of workers think that Social Security is going to be a major source of income in retirement. But in fact, for retirees it turns out that it’s a major source for 70 percent of them.
Instead, the opposite pattern tends to happen. We talked about workers exaggerating employment income. Also, workers tend to think their personal savings are going to do more for them than they actually do. And again, I think this goes back to what I talked about earlier, where workers tend to exaggerate how much income their nest egg is going to produce for them.
This is something I’ve actually also been studying, and other research as well, since 1989 and 1990. It’s interesting that the one thing that never seems to change, culturally, is that workers – I was looking at this even before we had 401(k)s in the workplace – tended to believe that their retirement savings would be a major part of their retirement income and felt that people should take responsibility for doing that.
Yet as people start approaching their 50s and 60s, all of a sudden things start to change, and they begin to realize that their own savings won’t be the major source of income, and a lot of them fall back on Social Security. This is a trend that’s been happening for many, many years.
We also asked what role a traditional pension or cash balance plan will play, and what we’re seeing is that workers and retirees give about the same response, which is a little strange because we know that pensions are declining and that that won’t be the case, and what we suspect is that perhaps people are hopeful that they’ll find a job with a pension.
We recently finished a study for the National Institute of Retirement Security, and one of the things we found is that there is a growing belief that pensions are important and really necessary for people to have a secure retirement, and some of that might be due to the fact that people are having less confidence in other sources.
Read the second half of this transcript as published in the October, 2013 issue of Retirement InSight and Trends.
About the Presenter:
Brian Perlman, PhD, ChFC, CLU is a partner at Matthew Greenwald & Associates and has close to 25 years’ experience conducting research for the financial services industry. As a Ph.D. risk research psychologist, he is also a chartered financial consultant and chartered life underwriter, and he brings a unique perspective when it comes to research.
At Greenwald, Brian has done work for over 30 financial services companies and just the big names that you can think of: MetLife, Prudential, Mass Mutual, Northwestern, New York Life, The Hartford, Principal, Money Magazine, Bank of America, Fidelity Investments: Just big names. And these assignments have included numerous qualitative and quantitative studies on life insurance and investment issues.Prior to working with Greenwald, Brian spent 10 years as director of strategic research for the American Council of Life Insurance, where he was responsible for running the Monitoring the Attitudes of the Public or the MAP program.