10 indicators of retirement confidence -- or lack of it
Strong returns in equity markets have undoubtedly helped buoy workers’ mood.
More than two-thirds of active workers surveyed by the Employee Benefits Research Institute said they were at least somewhat confident in their ability to retire securely, according to the 28th Annual Retirement Confidence Survey published by the non-partisan think tank.
That number is up from last year, but down from the pinnacle, reported at nearly 70 percent in 1999.
Strong returns in equity markets have undoubtedly helped buoy workers’ mood, but Craig Copeland, a senior research associate at EBRI, suggested that in at least some cases, workers may be overstating their sense of preparedness.
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“There is some level of false confidence when you start asking more specific questions,” said Copeland during a webinar hosted by EBRI and Greenwald & Associates, a research firm that co-authors the annual RCS.
“When you ask them to think about different aspects of retirement planning, they become less optimistic,” added Copeland, who noted that only 17 percent of the workers surveyed reported being very confident in their retirement prospects, down from a pinnacle of 24 percent in 2004.
The RCS shows a clear correlation between confidence levels and those that take steps to understand how much they will need to live on in retirement. “There is still a pretty high percentage that agrees that retirement makes them feel stressed,” said Copeland.
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Not calculating retirement’s expenses only exacerbates the problem. “Not knowing what they need is causing workers stress,” he added.
The RCS separates retirees’ experience in retirement from workers’ expectations, and examines the role workplace retirement plans have in establishing healthier savings habits.
Here are 10 takeaways from this year’s RCS:
1. One quarter have saved virtually nothing:
Among active workers, 26 percent have less than $1,000 saved.
That number is dramatically impacted by workers that have no access to a workplace savings plan.
For those with a workplace plan, only 10 percent have less than $1,000 saved, compared to 69 percent of those without access that have minimal savings.
2. High number of healthy savers:
For workers and retirees, 30 percent of respondents that reported access to a defined contribution plan have more than $250,000 saved. For retirees that had access to a DC plan, nearly half have more than $250,000 saved.
Comparing the experience of those with and without access to a DC plan is a “powerful indicator” of the role 401(k)s are playing in preparing workers for retirement, said Copeland.
3. Most are not actively calculating what they need to save:
Only 36 percent of respondents report having actively attempted to calculate what they will need to have saved for retirement, according to EBRI. In 1999, nearly half said they have made such calculations, the high water mark for active preparation levels in the survey’s history.
4. Confidence tracks with access to plans:
When they do take steps to calculate saving and spending needs in retirement, 60 percent of workers said they were at least somewhat confident in their approach. Confidence in preparation tracks with participation in workplace plans: 72 percent with access to plan said they were confident in their preparation, compared to just 42 percent of those that are not saving through employer plans.
5. Estimating costs helps with confidence, even if the estimations are not right:
Just one in five workers and four in 10 retirees say they have calculated how much money they will need to cover health expenses in retirement.
Those that have report higher levels of confidence, said Lisa Greenwald, executive vice president at Greenwald & Associates.
“We don’t know if the calculations were accurate or not, but just the act of doing it translates to higher confidence,” she said.
6. Don’t fear increasing the default:
Automatic enrollment’s power in increasing higher plan participation rates is well documented. So is the plan feature’s potential to suppress savings rates when workers are defaulted at low contribution levels.
This year’s RCS gauges respondents’ reaction to three different default levels: 3 percent, 6 percent, and 10 percent.
Employers are often reported to be hesitant to default workers at higher than 3 percent out of fear of blow back from savers.
But this year’s survey shows many savers are amenable to higher default rates.
For workers that are not saving in a plan, 60 percent said they would improve saving habits if they were defaulted into a plan at 3 percent.
And 53 percent of savers said they would be at least somewhat likely to save more if their default was raised to 6 percent. At 10 percent, there was more push back from respondents, but still an openness to the aggressive design strategy: 46 percent said they would save more if their plan defaulted at 10 percent.
“Automatic enrollment with higher than customary deferral rates may be one way to increase participation in plans and overall savings,” said Greenwald.
7. Low to modest plan engagement
In the past year, 35 percent of respondents reported increasing contribution levels to DC plans. And 23 percent said they changed their asset allocation.
About 58 percent said they engaged their record keeper’s website, and 12 percent engaged call centers—metrics that Copeland and Greenwald described as “low to moderate.”
But when they do engage with plan providers, participants report high levels of satisfaction. More than 90 percent said they were satisfied after engaging call centers, and 88 percent said they were satisfied with providers’ education materials.
8. Retirees not spending down their DC assets
Not all retirees with DC assets are spending them down. Fewer than 44 percent of retirees with assets in a DC plan rolled them over at retirement. One explanation: more than four in 10 report income from a defined benefit plan, compared to just 32 percent of workers that said they have a DB plan.
“A lot of retirees seek to preserve assets,” said Greenwald, as opposed to the “let the last check you write to the mortuary bounce” approach.
But that approach may not be available to today’s workers, 80 percent of whom expect their workplace savings plans to be a source of income in retirement, compared to half of retirees that use their DC savings for income.
“As a generation of full DC plans come into retirement, some things are changing,” added Copeland. ”We have to be careful comparing existing retirees to future workers because of this.”
9. When retirees roll assets out of DC plans:
Of retirees who had assets in a DC plan at the time of retirement, over four in 10 rolled at least some of that money into an IRA, three in 10 left some money in the plan, and two in 10 cashed out and put the money into a different investment. A third of retirees who moved money out of their plan did so on the advice of an investment professional.
10. What workers plan to do with DC savings:
Three in 10 workers say they don’t know what they will do with DC savings at retirement. Three in 10 expect to roll some savings in to an IRA; another one in four plan to leave at least some money in plan.
And 20 percent said they plan to purchase a lifetime income option, whereas only 7 percent of retirees said they have done so.