Rethinking retirement? Sure, inflation is disrupting plans to retire, say Americans
The uncertainties over the past few years have clearly affected workplace savers, who are now less sure about when retirement will come, what it will look like and how they should prepare for it, according to a new survey.
Worries over inflation are having an effect on how workers are saving and investing for retirement, a new study from MFS Investment Management has found.
The 2023 Global Retirement Survey queried more than 1,000 enrollees of defined contribution investment plans in the U.S., along with 3,000 investors on a global scale. The study found that 60% of U.S. respondents said that inflation has caused them to think differently about retirement. In addition, 61% of American respondents report adopting more conservative investment strategies, when compared to workers in Canada, Australia, or the United Kingdom.
“The uncertainties and disruptions over the past few years have clearly affected workplace savers, who are now less sure about when retirement will come, what it will look like and how they should prepare for it,” says Jeri Savage, retirement lead strategist at MFS. “Plan sponsors and advisors have an opportunity to educate workers on the benefits of staying invested, as well as how to get back on track and stay on track.”
A gloomy outlook
The survey did find a pessimistic mood among investors. Among U.S. respondents, 80% said they felt financial obligations are getting in the way of saving for retirement. Only 34% said they were confident they will be able to retire at the age they want to. One conclusion noted in the report: survey respondents were largely staying the course with their investments, but their overall confidence in the economy continues to decline.
Savage said that employers and plan advisors don’t have to just hope things get better—there are steps they can take now to help plan members. “What’s clear is that the current environment has led to anxiety and a decline in retirement confidence,” she said. “Employers can focus on making sure their plans have the right tools and resources for participants to access now to help them stay on track. Taking a simple wait-and-see approach might work for some participants who are not as engaged and are less likely to make changes to their retirement accounts, but it won’t work for all. We don’t want to see participants decrease their savings or try to be market timers.”
Some of the things she recommends:
Consider if your plan has the tools and resources to address the economic anxiety of plan members, and to keep them on track with their investment plan.
- Consider exploring what it would look like to support a gradual transition for employees into retirement, rather than a full stop.
- Make sure that advice is available and that it is flexible to meet the needs of different demographics. The survey showed that 70% of participants say they would use an advisor if a plan offered one.
- Examine those resources to be sure they include tools to help with enrollees’ plan for the complexities of retirement, which can be a source of anxiety for some.
TDFs are an area of concern
The study noted that one specific area where consumers need more clarity—the use of target date funds (TDFs). These are all-in-one funds designed to rebalance and re-allocate retirement funds automatically over time. These funds are widely used (56% participation among those surveyed), however, many seem confused over how best to implement this tool.
“While plan participants understand TDFs are an easy way to diversify through a single fund and grow more conservative over time, most incorrectly believe they provide a guaranteed stream of income or a guaranteed rate of return or invest only in cash and other low-risk assets,” the report noted.
“Our survey highlights that more education is needed to ensure that retirement investors understand the important role that TDFs can play in retirement strategies,” added Savage. “That education can help increase participation in TDFs, especially by those who may not yet understand their benefits.”
Related: Empower (inflation-weary) employees as they struggle to save for retirement
Savage noted that overall, TDFs have been successful, but that the report data suggests that many investors don’t really know how to use TDFs to their greatest benefit. “Where we get concerned is when we see a TDF simply mixed in with a bunch of other investment options, because it signals that the user doesn’t truly understand the role of a TDF and therefore may not be allocated appropriately,” Savage said. “The survey also finds a lot of confusion around the role of TDFs in retirement—specifically concerning how many respondents think they provide guaranteed income.”
Overall, the study said that the best way to address enrollees’ anxiety about issues such as inflation is to stress education and provide resources. “Along with recent market disruptions, inflation, which has returned in a meaningful way for the first time in a generation, is clearly influencing how Americans save and invest for retirement and what they think retirement will look like,” the report said. “But the survey also underscores the need for accessible financial advice through workplace retirement plans to help Americans as they juggle retirement with competing priorities, including saving for emergencies and education, and paying off student loans.”