Working-Age Americans Fall Short of Retirement Savings Targets

Working-Age Americans Fall Short of Retirement Savings Targets

The retirement savings of working-age Americans are far below the levels needed for a secure retirement, despite the recent economic recovery, according to the findings of a study published on September 17 by the National Institute on Retirement Security (NIRS).

Based on an analysis of U.S. Census Bureau data, the research report “Retirement in America: Out of Reach for Most Americans?” found that the median retirement account balance among all working individuals is $0; and that 59.3% of the working-age population (ages 21-64) in the U.S., or more than 100 million individuals, do not own any retirement account assets in an employer-sponsored defined contribution (DC) plan or individual retirement account (IRA), and are not covered by a defined benefit (DB) pension.

The analysis indicated that even after counting an individual’s entire net worth—a relatively generous measure of retirement savings—76.7% of working Americans fall short of conservative retirement savings targets for their age and income, based on working until age 67. The results further showed that among workers who have accumulated savings in retirement accounts, the typical worker has a modest account balance of $40,000. Researchers noted that 68.3% of individuals ages 55 to 64 have retirement savings equal to less than one times their annual income, or far below the level they will need to maintain their standard of living over their expected years in retirement.

Moreover, the analysis revealed that growing income inequality contributes to the gap in retirement account ownership. The report found that workers in the top income quartile are five times more likely to have retirement accounts than workers in the lowest income quartile, and that individuals with retirement accounts have, on average, more than three times the annual income of individuals who do not own retirement accounts.

Researchers attributed this retirement savings shortfall to a multitude of factors, such as the increase in the Social Security retirement age, and to a more general breakdown of the nation’s retirement infrastructure. They noted that there is a huge retirement plan coverage gap among American workers, with the share of workers who have DB pensions declining as employers replace these plans with 401(k) and other DC plans in which the risks and much of the funding burden fall on individual employees.

The report’s authors also emphasized that the financial crisis of 2008 exposed the vulnerability of the DC-centered retirement system, as the asset values in Americans’ retirement accounts fell from $9.3 trillion at the end of 2007 to $7.2 trillion at the end of 2008. Researchers noted that the economic downturn also triggered a decline in total contributions to DC retirement accounts as many employers stopped matching employee contributions. While observing that the combined value of 401(k)-type accounts and IRAs had risen to $16.9 trillion by the end of 2017, researchers pointed out that this increase in total retirement account assets has not translated into improved retirement security for the majority of American workers and their families who have no retirement savings.

The report’s authors recommended that policymakers and employers take steps to address these challenges. In addition to calling for the strengthening of Social Security, they suggested expanding access to low-cost, high-quality retirement plans, including DC savings plans, DB pensions, and hybrid or combination DC/DB plans. They also recommended helping low-income workers and families save with improved tax credits. In particular, they observed, expanding the Saver’s Credit and making it refundable could help boost the retirement savings of lower-income families. They also noted that a number of states are taking action to expand access to workplace retirement savings, with enrollment in state-based programs starting this year in Oregon, Washington, and Illinois.

From Benefit Trends Newsletter, Volume 61, Issue 10

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Many Americans See Social Security as Main Source of Income

Many Americans See Social Security as Main Source of Income

While most Americans are aware of the steps they should be taking to prepare for retirement, many are struggling to build adequate savings, and thus expect to rely heavily on Social Security after they stop working, a survey carried out by digital wealth manager Personal Capital has shown.

The survey of 2,008 U.S. adults aged 18 and older—including 1,630 pre-retirees—was conducted on March 1-7, 2018. When asked to identify their primary source of retirement income, 27% of the pre-retirees surveyed cited an employer-sponsored plan, but one-quarter cited Social Security, including 15% of millennial and 29% of Gen X respondents. The findings also indicated that 51% of all of the pre-retirees surveyed and 62% of the millennial respondents plan to retire at age 65 or younger, or at least a year shy of the age at which Americans born after 1943 are entitled to collect the full Social Security benefit.

Somewhat surprisingly, the survey results indicated that Gen Xers are almost as likely as Millennials to lack adequate savings, despite having less time to save before reaching retirement age. Even though more than half of respondents of both generations (56% and 57%, respectively) said they expect they will need to save more that $1 million for retirement, 34% of the Gen Xers and 39% of the millennials surveyed admitted they have no retirement savings. In addition, the Gen Xer respondents were less likely than the millennial respondents to report that they max out their employer-sponsored plan contributions (18% vs. 22%),

Moreover, the survey showed that younger workers are less likely than older workers to place importance on getting financial advice on retirement planning: just 24% of Gen Xer and millennial respondents said they believe that consulting a skilled financial advisor is crucial to achieving a comfortable retirement, compared to 30% of the baby boomers surveyed.

The survey also uncovered significant gender differences in retirement planning patterns. For example, more of the female than the male pre-retiree respondents indicated that they understand that sticking to a comprehensive financial plan (62% vs. 47%, respectively) and leveraging a skilled financial advisor (28% and 24%, respectively) are critical to securing a comfortable retirement. The results also showed, however, that 40% of the female respondents, compared to 33% of the male respondents, admitted that they have no retirement savings; and that 71% of female respondents, compared to 56% of male respondents, acknowledged that they do not know their net worth.

The findings suggested that the gender gap in retirement savings may be partially attributable to women being less likely than men to have access to a range of retirement savings options, as 27% of the employed women surveyed, compared to 19% of their male counterparts, reported that they are not offered an employer-sponsored retirement plan. But the survey results also showed that when women have access to these benefits, they often fail to take full advantage of them: the female respondents were found to be less likely than their male counterparts to contribute to a retirement plan offered by their employer (58% vs. 67%) or to max out contributions to their employer-sponsored retirement plan (16% vs. 26%).

From Benefit Trends Newsletter, Volume 61, Issue 8

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Millennial Workers Benefit from Automatic Features in Retirement Plans

Millennial Workers Benefit from Automatic Features in Retirement Plans

Millennials are the first generation of workers to fully benefit from improvements made to retirement plans over the last decade, including the introduction of automatic features, and these improvements are reflected in their retirement savings habits and attitudes, the results of a survey conducted by retirement benefits consultancy Empower Institute indicate.

The survey of 4,038 working adults aged 18 to 65 was conducted between December 18, 2017, and January 21, 2018. Researchers observed that the landmark Pension Protection Act of 2006 (PPA), which was enacted at a time when the millennials were first entering the workforce, recognized the importance of employer contributions to employee accounts, and reformed workplace retirement plans in a number of ways.

Most significantly, researchers noted, the PPA allowed retirement plan sponsors to implement automatic enrollment of plan participants and automatic escalation of participants’ contributions. The survey found that 41% of millennial respondents are automatically enrolled in a defined contribution plan, compared to 38% of Gen Xer and 33% of baby boomer respondents; and that 38% of millennial respondents are enrolled in a plan with auto-escalation features.

The survey results included a retirement progress score (RPS), or a numeric estimation of the percentage of working income that U.S. households are on track to replace in retirement. The findings showed that the median projected income replacement among all the survey participants is 64%. Broken down by generation, the findings indicated that respondents of the millennial generation (born after 1981) are on track to replace 75% of their income in retirement, compared to 61% for Generation X and 58% for baby boomer respondents. Researchers also observed that there is an 11-point difference in median income replacement percentages among participants across all generations who were enrolled automatically in a defined contribution plan and those who opted into a plan.

In addition, the survey results suggested that attitudes about retirement planning differ across the generations, with millennial workers expressing less certainty than their older counterparts that Social Security will provide them with retirement income in the future. When asked to identify the sources they expect will provide them with income during retirement, 59% of millennial respondents cited Social Security, compared to 88% of boomer and 73% of Gen X respondents. By contrast, 61% of the millennials surveyed, compared to 55% of the Gen Xers and 47% of the boomers, said they see defined contribution plans as a likely source of income in retirement. Moreover, 48% of the baby boomers surveyed said they believe they will need to work at least part-time in retirement, compared to 44% of the Gen Xers and 40% of the millennials.

The findings further indicated that while millennial respondents currently have smaller amounts of investable assets than Gen Xers and baby boomers, who have been in the workforce longer, these younger workers are more likely than their older counterparts to have a financial advisor and a formal retirement plan: 24% of millennial respondents reported having a formal retirement plan, compared to 19% of Gen X and 17% of baby boomer respondents. The overall retirement progress scores of respondents were also found to vary depending on whether they reported receiving paid advice: those with a paid advisor had a median retirement progress score of 91%, while those without a paid advisor had a median RPS of only 58%.

From Benefit Trends Newsletter, Volume 61, Issue 8

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Divorce Can Have a Substantial Impact on Retirement Security

Divorce Can Have a Substantial Impact on Retirement Security

Getting divorced has large negative effects on the retirement readiness of American households, but divorced women are generally no worse off than single women who have never married, a study published by the Center for Retirement Research at Boston College concluded.

The research brief, “How Does Divorce Affect Retirement Security?” by Alicia Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher, was published in June 2018. The authors investigated how divorce impacts the National Retirement Risk Index (NRRI), which is calculated by comparing households’ projected replacement rates—or retirement income as a percentage of pre-retirement income—with target replacement rates that would allow them to maintain their standard of living in retirement. These calculations are based on the Federal Reserve’s triennial Survey of Consumer Finances (SCF), which uses a nationally representative sample of U.S. households.

The authors observed that although the divorce rate is no longer rising, about 40% of marriages in the U.S. will end in divorce. The brief outlined the main types of financial setbacks couples typically experience when they divorce, including having to cover legal fees and other short-term expenses associated with the breakup; being forced to sell the family home, sometimes at a suboptimal time in the housing market; having to divide financial and retirement wealth between two new households, which may force the spouses to sell assets prematurely; and having to take on the cost of maintaining two households instead of one, which can increase living expenses and, in some cases, income taxes. The authors also noted that divorced women in particular may find it difficult to work and to save for retirement because they have child care responsibilities, while divorced men who are non-custodial parents may face problems saving because they have to cover child support and alimony payments.

Based on the assumption that these financial losses almost certainly inhibit each spouse’s ability to save for retirement, the study looked at the questions of how severely divorce affects retirement readiness, and how these effects vary by household type. Not surprisingly, the results showed that both wealth and earnings are lower for households with a previous divorce than for those with no history of divorce: the average net financial wealth of non-divorced households was found to be $132,000, or about 30% higher than the $101,000 held by divorced households.

The findings also indicated that this less favorable economic profile carries over to the NRRI, as 53% of households who have gone through a divorce were found to be at risk in retirement, compared to 48% of households with no history of divorce. After controlling for other factors like income group and age, the analysis showed that the share at risk is 7.3 percentage points higher for the divorced households than for the households with no previous divorce. To put this figure into perspective, researchers pointed out that the Great Recession increased the NRRI by nine percentage points, which suggests that the impact of divorce is large.

However, the analysis also found that not all household types are equally affected. The results revealed that compared to their non-divorced counterparts, married couples with a previously divorced spouse are 9.4% more likely to be at risk in retirement and divorced single men are 5.5% more likely to be at risk in retirement, but that divorced single women are not disadvantaged relative to non-divorced single women. To explain this lack of a difference in retirement readiness between divorced and single women, the authors observed that although divorced women are more likely than single women to have children, which can reduce their ability to save for retirement, they are also more likely to own a home.

From Benefit Trends Newsletter, Volume 61, Issue 7

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Progress in Retirement Saving Varies According To Worker Characteristics

Progress in Retirement Saving Varies According To Worker Characteristics

While American workers are making progress in reaching their income replacement goals for retirement, large differences remain between those workers who are planning and saving effectively for retirement, and those who are not, according to the findings of a study of how financially prepared Americans are for retirement published in April by the Empower Institute, the research arm of retirement plan record-keeping firm Empower Retirement.

The findings of the study, “Scoring the Progress of Retirement Savers,” are based on the results of a survey of 4,038 working adults aged 18-65 conducted between December 18, 2017, and January 21, 2018. When asked to identify the sources they expect to provide income to their household during the first five years of retirement, 71% of respondents mentioned Social Security, 56% cited a workplace-provided defined contribution plan, 38% said personal savings, 29% said employment or self-employment, and 19% cited a traditional pension.

More than two-thirds (67%) of the workers surveyed reported that at least one earner in their household has access to a defined contribution plan at work. The median projected income replacement percentage among all survey participants was found to be 64%; meaning that the median respondent is on track to replace 64% of his or her current income in retirement. However, the results also showed that the median income replacement percentage is 79% for respondents who indicated they have access to a defined contribution plan and are actively contributing to it, compared to 45% for those without access.

Looking at the impact of deferral rates, the analysis estimated that those respondents who are contributing under 3% of pay have a median lifetime income replacement percentage of 59%, while those who are contributing 10% or more have a median lifetime income replacement percentage of 128%. Focusing on the effects of automatic features, the analysis showed that respondents who were auto-enrolled in a retirement plan have a median lifetime income replacement percentage of 95%, compared to 84% for those who opted in; and that respondents in a plan with auto-escalation have a median retirement income replacement percentage of 107%, compared to 84% for those in a plan without this feature.

To explore the factors that might inhibit retirement plan participation, respondents were asked which circumstances would likely prompt them to start contributing to or to increase their contributions to a plan. Nearly one-third (32%) of the workers surveyed cited paying down debt, 22% said receiving a raise, and 12% said reducing their overall spending.

The analysis also revealed that respondents closest to retirement have the lowest projected replacement percentages, while those furthest from retirement have the highest projected replacement percentages: the millennials surveyed were found to be on track to replace 75% of their income, while the median projected income replacement percentage for the early boomers was shown to be just 55%.

The study additionally uncovered large differences in projected income at retirement based on gender, as the median projected income replacement percentage was 71% for the male respondents, but just 59% for the female respondents. Researchers attributed this gender gap in part to the somewhat higher retirement plan participation rates among men (69%) than among women (66%), as well as to the lower average contribution rates among women than among men.

The findings further indicated that there are important differences in projected income replacement based on the industry in which respondents are employed: the median scores were found to be highest among respondents in the financial services industry; and lowest among those in health care, social assistance, trade, transportation, and utilities.

From Benefit Trends Newsletter, Volume 61, Issue 6

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Financial Fragility of Retirees May Be Increasing

Financial Fragility of Retirees May Be Increasing

Observing that retired people have long been seen as financially fragile because they have little ability to increase their income, a study recently published by the Center for Retirement Research at Boston College found that most current retirees appear able to absorb a financial shock without a substantial reduction in their standard of living, but that future retirees might turn out to be more financially fragile as they derive less of their income from Social Security and traditional pensions and more from financial savings in 401(k)s.

Published in February 2018, the brief, “Will the Financial Fragility of Retirees Increase?” was written by research fellow Steven A. Sass. The analysis was based on reviews of studies by the Social Security Administration’s Retirement Research Consortium and others that examine how the growing dependence on household savings affects the financial fragility of the elderly.

The shocks most likely to hit the elderly were identified in the study as a spike in medical expenses and losing a spouse. The brief cited research showing that in 2013-2015, more than 20% of families aged 65 or older had to make a medical payment of at least $400, more than 1% of their annual income, and more than two standard deviations above the family’s normal monthly mean expense on health care. In addition, the brief reported the results of a study showing that women widowed between 2002 and 2004 typically got 62% of the couple’s Social Security benefit and only half the couple’s employer pension benefit.

However, the analysis found that despite being exposed to such shocks, most retirees appear to be absorbing them without incurring much hardship. For example, the brief noted, a recent study found that only 10% of households aged 65 or older reported cutting back on needed food or medication over the previous two years. “Public and private health insurance, family contributions, and the savings of the elderly seem sufficient to allow most to avoid a significant reduction in living standards,” Sass said.

At the same time, Sass acknowledged that future retirees may be less able to absorb such shocks because of their high degree of reliance on savings from 401(k) and similar defined contribution plans. For future retirees, he observed, retirement income replacement rates are projected to decline due to inadequate savings and the limited income that safe withdrawal rates provide, thereby reducing the cushion between their incomes and fixed expenses.

Overall, he concluded, the increased dependence on financial assets is likely to increase the fragility of the nation’s retirement income system given inadequate retirement savings, the limited income households are likely to get from their savings, and their greater exposure to market downturns if they hold a significant portion of their savings in equities. Among the strategies households approaching retirement can use to increase their retirement income and reduce their fixed expenses, Sass observed, are to work longer, annuitize wealth, take out a reverse mortgage, and downsize. “Whether the prospect of increased financial fragility leads them to change their behavior remains to be seen,” he said.

From Benefit Trends Newsletter, Volume 61, Issue 5

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.