Retirement Readiness
“Retirement Readiness,” or the state of employee preparation for retirement, may be the most important criteria for measuring the success of every employer sponsored retirement plan. By any measure, the current overall state of employee retirement readiness is inadequate. Virtually all of the numerous studies conducted by industry, investment and academic sources reflect the low level of retirement readiness for employees of all ages and income levels.
According to a recent Employee Benefits Research Institute (EBRI) study, just 18 percent of American workers feel “very confident” about having enough money for retirement. With only 42 percent of workers feeling “somewhat confident”. In addition, 3 in 10 workers report that preparing for retirement causes them to feel mental or emotional stress. Another 30 percent of workers state that they worry about personal finances while at work.
The 2017 Retirement Confidence Survey, March 21 2017, Employee Benefit Research Institute
Estimating Need
Workers are not very good at developing realistic estimates of their retirement needs, either in terms of a lump sum or monthly income. Perhaps most concerning is that many workers merely “guess” at their needs.
The 2018 Retirement Preparedness Survey conducted by The Harris Poll (on behalf of PGIM Investments) found that “only 47% of pre-retirees could estimate the lump sum needed to finance their retirement.” But Harris Poll calculations indicated that only half of those respondents provided a sum that would last at least 18 years – the average length of retirement.
The study further found that:
43% of those surveyed provided a “best guess” estimate
53% responded using their current monthly cost
Only 24% used an online calculator or spoke with a financial advisor to form their estimates
In their 2018 Annual Transamerica Retirement Survey, the Transamerica Center for Retirement Services Found results very similar to those of The Harris Poll.
46% of workers providing an estimate of their retirement savings need said the “guessed” to arrive at their estimate
23% estimated their need based on current living expenses
Only 7% used a retirement calculator
Inadequate Savings
The majority of workers admit that they have inadequate savings to meet their retirement needs. In many cases the shortfall is significant. According to the EBRI study referenced above, many workers acknowledge their retirement savings shortfall, “stating that they need to save a sizeable, perhaps unmanageable, share of their total household income in order to live comfortably in retirement.”
Of those workers providing an estimate of the amount they need to save:
24% estimate they need to save between 20 and 29 percent of their income
25% estimate that they need to save 30 percent or more of their income
In comparing worker estimates of required annual savings rates versus current savings rates, the EBRI study discovered some alarming differences:
The median estimated savings rate is 16% while the actual savings rate is 10%
Over 50% of respondents estimated a necessary savings rate of 13% while the actual rate 4%
The Harris Poll survey reached some eye opening conclusions regarding current employee retirement savings rates:
“Astonishingly, 25% or pre-retirees are not sure how much they are currently saving for retirement. Meanwhile™, nearly one in five Gen Xers and one in three Millennials aren’t saving for retirement at all.”
Low Confidence Level
Many workers do not feel confident about how to manage their retirement savings, particularly savings in a retirement plan. According to the EBRI study, less than 20% feel very confident in three critical retirement planning issues, and only about 36% more feel somewhat confident.
Furthermore, retirement plan participants are somewhat intimidated and confused by the investment choices offered by their employer sponsored plan. The resulting concerns often lead participants to make inappropriate (or no) retirement plan investment choices, thus lowering their retirement readiness status. In their 2017 401(k) Participant Survey, Schwab investments found that overall 401(k) participant enthusiasm is offset by serious doubts and stress, as evidenced by the following survey excerpt:
| I wish I had an easier way to know how to choose the investments for my 401(k) | 66% |
| I feel totally on top of my 401(k) investments | 58% |
| I don’t feel I know what my best 401(k) investment options are | 45% |
| I feel a lot of stress about choosing the right investments for my 401(k) | 44% |
| The 401(k) plan offered through my employer is too confusing (for me to make a choice) | 34% |
Lack of Planning
The cumulative effect of unrealistic estimates of need, too little savings and low confidence in self-management has resulted in the fact that the majority of workers have an inadequate or no formal plan for retirement.
The 2018 Annual Transamerica Retirement Survey found that although 63% of workers stated that they have some form of retirement strategy, only 16% have a written plan. In addition, 37% of workers do not have any retirement strategy.
Further, the survey finds that the top source of information utilized for retirement planning and investing continues to be “friends and family” – utilized by 35% of survey respondents.
The 2018 Retirement Preparedness Survey by The Harris Poll likewise concluded that:
“Seventy-nine percent of pre-retirees agree they should be doing more to prepare for retirement…but only 48% say they have a strong retirement plan in place, nearly two-thirds do not use a financial advisor, and almost one in five Gen Xers and one in three Millennials are not saving for retirement at all.”
This lack of planning for retirement foreshadows the potential difficulty for your employees, and related consequences for you company, in transitioning from active employment to retirement. Especially concerning should be the impact on current middle-aged workers.
In 2017 three actuarial bodies for the United States, the United Kingdom and Australia analyzed the Retirement Readiness of all three countries. Finding little significant difference between the three countries, the analysis points to some practical concerns for workers and retirement plan sponsors everywhere:
“The results clearly indicate widespread lack of preparation, even when information is sought and some savings reported. Understanding and managing retirement risks can be extremely complex, and adequate preparation may challenge the ability of many, regardless of the amount of education provided.”
“That 40% or more of those 55 or older are not preparing is surprising and disturbing.”
“Most problematic are the 60% of middle-aged respondents who are not preparing to retire. Failure by this group to prepare now might be the clearest indication of need for more effective action across all three countries to engage people in their retirement planning.”
Retirement Readiness, A Comparative Analysis of Australia, the United Kingdom & the United States;
American Academy of Actuaries, Institute and Faculty of Actuaries, Actuaries Institute Australia, 2017.
