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.

Debt Levels of Older Households Increasing

Debt Levels of Older Households Increasing

Noting that financial liabilities are a vital but often ignored component of retirement income security, researchers at the Employee Benefit Research Institute (EBRI) recently published the results of an analysis showing that while debt levels among families headed by an individual aged 55 or older appear to have eased since the financial crisis, the debt burdens of older households have been increasing overall since the early 1990s.

The results of the study, “Debt of the Elderly and Near Elderly, 1992-2016,” by senior research associate Craig Copeland, are based on an examination of data from the Federal Reserve’s Survey of Consumer Finances (SCF). The aim of the study, published on March 5, was to identify trends in debt among older American families with a head aged 55 or older. The analysis also looked separately at debt levels among near-elderly families, defined as those with a head aged 55-64; and among elderly families, defined as those with a head aged 65 or older.

The study found that debt levels among elderly and the near-elderly families reached their highest levels in 2010, and declined thereafter. The results indicated that the average amount of debt of families with a head aged 55 or older was $76,679 in 2016, down from $82,968 in 2010 (in 2016 dollars). Moreover, among these older families, debt as a percentage of income decreased from 11.4% in 2010 to 8.2% in 2016, and debt as a percentage of assets declined from 8.4% in 2010 to 6.5% in 2016.

However, the analysis also uncovered a longer-term increasing trend line in the share of families with a head aged 55 or older with debt, from 53.8% in 1992 to 68.0% in 2016. The results further indicated that between 2007 and 2016, the share of families with a head aged 75 or older who were carrying debt increased sharply, from 31.2% to 49.8%.

In addition, the research found that while the overall percentage of families with a head aged 55 or older with debt payments in excess of 40% of income (a threshold commonly used to determine whether a family has an issue with debt) declined from a peak of 9.9% in 2007 to 6.9% in 2016, the percentage of families with a head aged 75 or older with debt payments in excess of 40% of income increased from 4.3% in 2007 to 5.3% in 2016.

An examination of the types of debt held by older households showed that housing debt drove the changes in debt payment levels from 2001 to 2016, while the consumer debt payment share of income was relatively stable over that period. The findings indicated that between 1992 and 2016, housing debt payments of older families were one to three times larger than their non-housing debt payments. However, the analysis revealed that for these older households, housing debt payments as a percentage of income were lower in 2016 (5.7%) than in 2010 (8.3%) and 2013 (7.0%).

Not surprisingly, the study also found that between 1992 and 2016, younger families with a head aged 54 or younger were more likely to have been carrying debt than older families, and had higher debt payments as a percentage of income. However, the findings also indicated that families with a head aged 55-64 were more likely to have had debt payments in excess of 40% of income than any other age group over the study period.

“While improving in many respects in the most recent years, the longer-term trends in debt are troubling as far as retirement preparedness is concerned,” Copeland observed. “We see in the data that American families just reaching retirement or those newly retired are more likely to have debt than past generations, specifically those in the 1990s.”

From Benefit Trends Newsletter, Volume 61, Issue 4

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.

Helping Employees Meet Retirement Goals by Quantifying Readiness

Helping Employees Meet Retirement Goals by Quantifying Readiness

To minimize disruptions in the natural progression of workforce turnover and to foster sound workforce planning, employers should help employees stay on track for retirement by quantifying their levels of retirement readiness, a study released by Sibson Consulting has recommended.

The study, “Quantifying Retirement Readiness: How to Determine if Your Employees Are on a Smooth Path to Retirement,” was published in the January 2018 issue of the firm’s newsletter. According to the analysis, many employers have no idea how financially prepared their employees are for retirement. For example, the study’s authors pointed out, companies may be unaware that they have quite a few later-career employees who are nowhere near ready for retirement, or a number of mid-career employees who have plenty of savings to retire and are looking for an early exit.

The study’s authors therefore recommended that employers use a comprehensive strategy to understand how retirement readiness—defined as the ability to retire with sufficient income to maintain the individual’s current standard of living throughout retirement—affects their business. Specifically, they suggested that employers identify which employees appear to be on track for a timely retirement and which do not, and take steps to help employees financially prepare for retirement.

According to the study, the most direct metric for retirement readiness is the replacement ratio, which defines the required income for retirement as a percent of income just before retirement. Setting a ratio of 80% as the benchmark, the authors observed that part of the replacement income will come from Social Security and other retirement vehicles, while the remainder will come from savings and other assets. However, they cited research showing that the contributions of these sources will vary by generation: for example, whereas the average retiree currently aged 69-89 receives an estimated 22% of his or her income from an employer-sponsored pension, a worker currently aged 25-49 can expect to receive only 12% of his or her retirement income from an employer-sponsored pension.

The study’s authors further emphasized that when employees start accumulating retirement wealth and when they begin drawing from this accumulation are key to determining an appropriate savings rate. They warned that since most replacement ratios use a retirement age of 65, employees who plan to retire before that age will need to accumulate more savings to attain the same replacement ratio for the additional years in retirement. While acknowledging that there is no single “right” answer for a wealth-accumulation target, researchers estimated that a target of 10 times the individual’s pay is reasonable for a worker retiring at age 65.

Finally, researchers advised employers to provide employees with a qualitative assessment of their progress so they can see if they are falling short of their desired replacement ratio and wealth-accumulation target. For example, employers can use retirement-readiness letter grades that score an employee’s current standing based on his or her age plus the expectation that he or she will reach an appropriate level of retirement readiness.

“Once this information is clear, the next step is to develop and implement strategies to help employees retire when they want to,” the study’s authors concluded, adding that these strategies may include using plan design analysis/changes, educational materials, or communications campaigns to affect behavioral changes.

From Benefit Trends Newsletter, Volume 61, Issue 3

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.

Retirement Readiness Shows Signs of Waning

Retirement Readiness Shows Signs of Waning

While the retirement systems in the United States, the United Kingdom, and Australia differ in important ways, all are falling short to varying degrees in ensuring that workers in those countries are adequately preparing for retirement, according to an article published by human resources consultancy Findley Davies in its November/December 2017 newsletter.

The article, “Retirement Readiness—How Do We Compare?” was written by Ken Hohman, an actuary and management consultant. Hohman presented a comparison of the retirement systems in these three countries based on his involvement on behalf of the American Academy of Actuaries with a project in collaboration with the Actuaries Institute in Australia and the Institute and Faculty of Actuaries in the UK.

Hohman observed that Australia, the UK, and the U.S. have similar but significantly different retirement systems. Specifically, he explained, each country has a national social security system that is weighted in favor of lower-income individuals, but the degree of weighting varies greatly among the systems. He also pointed out that each country has employer-based retirement plans, but that these range from mandatory plans with significant mandatory contributions (Australia), to mandatory auto-enrollment plans with the ability for an individual to opt out (UK), to voluntary plans with voluntary auto-enrollment (U.S.). Moreover, he noted, each country offers voluntary tax-favored options for personal savings.

In the article, Hohman reported on the results of a survey the project conducted of nearly 3,000 working-aged individuals (ages 18-64) divided among the three countries that looked at three main topics: the retirement transformation, preparing for retirement, and the ability to address retirement risks. He noted that the survey findings suggest that the perceptions of what retirement is have clearly changed in the years since the financial crisis of 2008, with workers today saying they expect to retire later and with lower expectations. The survey found, for example, that 30% of respondents said they have no thought of ever retiring; and that of the 70% who do plan to retire, 73% indicated that they plan to retire gradually.

According to Hohman, the most meaningful finding of the survey is that an average of only 42% of respondents expect to have a comfortable retirement, with respondents in the UK (36%) lagging well behind those in Australia (46%) and the U.S. (47%) in anticipated retirement lifestyle. “This raises the question of whether those living in the UK are less prepared for retirement or simply more honest in their long-term outlook,” he said.

The survey used four criteria to determine whether respondents are preparing appropriately for retirement: whether they are seeking out ways to educate themselves regarding retirement savings and risks; whether they have already started saving for retirement; whether they know how much income they will require in retirement, and how much they will have accumulated at retirement; and whether they have planned for an unanticipated early cessation of work due to events such as job loss or ill health. The average of these four criteria indicated that 48% of U.S. respondents and 43% of Australians are reasonably prepared, compared to 35% of respondents in the UK, who were shown to lag behind in all four criteria.

The survey findings also showed that retirement preparation increases with age and income, and that men are more likely to be prepared than women. The average retirement preparation score was 47% for men and 34% for women; and the gender gap was greatest in Australia, at 54% for males and 32% for females.

In addition, the survey respondents were asked about the degree to which they have anticipated five specific post-retirement risks: how long their savings will have to last; whether they have a plan for how they will spend down their retirement assets; whether they have planned for living longer than expected; what they will do if they experience a significant loss in their retirement assets; and whether they have planned for the risk of chronic ill health.

The results showed that little more than half (56%) of the respondents indicate they have taken steps to address these five retirement risks. Hohman observed that the average score by country shows the familiar pattern of stronger preparation in the U.S. (63%) and Australia (61%) relative to the UK (48%), and that this average is driven by the finding that 77% believe they have appropriately planned for a drop in their retirement assets. He cautioned, however, that the vast majority of these respondents indicated that their “plan” for this contingency is to go back to work.

Commenting on these findings, Hohman said that “it is obvious that all three countries have done a good job educating workers about retirement saving and getting them to actually start saving, but all three have failed to help people understand the amount of savings needed or to recognize the risk that events could intercede to shorten the savings horizon.”

From Benefit Trends Newsletter, Volume 61, Issue 2

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.