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Trouble in paradise?

EBRI survey points to a crisis of confidence on retirement

Respondents had doubts over how much savings is needed

031912 vanderhei
Increasing: Jack VanDerhei believes auto enrollment is a good option for boosting retirement savings.

Americans have little confidence that they will be able to retire comfortably, driven in part by a lack of understanding of how much they need to save, according to an EBRI survey.

According to a survey of 1,262 workers and retirees released March 13 by the Employee Benefit Research Institute, only 14% of the 1,003 workers polled were “very confident” they will have enough money to retire comfortably, according to EBRI's 22nd annual Retirement Confidence Survey.

While among the 259 retirees surveyed, confidence in having a financially secure retirement was higher and had remained stable from previous years, still only 21% of those respondents were also “very confident.”

One of the greatest obstacles for workers is understanding how much they need to save for retirement, according to Jack VanDerhei, Washington-based EBRI research director who co-authored the report with market research firm Mathew Greenwald & Associates.

Only 42% of workers say they and/or their spouse have tried to calculate how much retirement income they will need to retire comfortably.

“We've been doing this for 22 years and I've been involved with this for many of those years, and I have no idea how someone can plan for retirement without having any idea what the target should be,” said Mr. VanDerhei.

“How do you know if your contribution rate is high enough, how do you know if your asset allocation should be more aggressive, if you have zero idea of what the target is? Over all these years, that has never failed to amaze me and concern me.”

Of the workers surveyed, 34% said they need to save less than $250,000, while 20% believed they need to save $500,000 to $999,999 and 18% had a goal of $250,000 to $499,999. Fifteen percent of workers believed they need to save more than $1 million. Nearly half of workers — 42% — say they often guess at the numbers rather than doing a systematic retirement-needs calculation.

Those who do calculations tend to make higher savings goals than other workers. For example, 22% of workers who have done the calculations believe they need to save at least $1 million compared with 9% of those who have not.

Nevin Adams, co-director, EBRI Center for Research and Retirement Income, and director, education and external relations, said workers who do the calculations and realize they need to set their savings goals higher feel more confident about being prepared for retirement.

“They realize the exact size of the problem and come up with a decent strategy because they know the size of the problem they're dealing with,” Mr. Adams said.

“It's not a measure of comfort. It's that now they've put the size of the problem (in focus).”

But the majority of workers — 60% — have less than $25,000 in savings, excluding the value of their home or any defined benefit plans. That total is up from 20% in 2009. (Thirty percent of workers surveyed have less than a total of $1,000 in savings.)

Immediate concerns

Much of the lack of confidence might be due to more immediate financial concerns. Forty-two percent of workers and 41% of retirees responded that job uncertainty is the most pressing financial issue facing Americans today.

Other issues that both workers and retirees cited as major concerns were: Making ends meet; the economy; making mortgage payments; paying down debt; and paying for health insurance or medical expenses.

Only 2% each of workers and retirees identified saving for or planning for retirement as America's most pressing financial issue.

Workers also are expecting to retire later in life. The percentage expecting to retire after age 65 grew to 37% in 2012 from 11% in the 1991 survey, while the percentage of retirees who reported they retired after age 65 was at 18% in 2012, up from 8% in 1991.

Several factors might have played into these changes over the past 20 years, according to Mr. Adams.

There is a sense “that people are afraid they won't be able to afford to retire at normal retirement age so they're saying, "I'm going to have to work longer because I can't afford to lose my insurance,' ” said Mr. Adams. “Maybe they've been paying attention to the financial columnists who talk about the financial advantages of postponing retirement.”

Additionally, “more people are working at jobs that don't require as much physical effort as in the past,” enabling them to work longer, he added.

The greatest gap between retirees' experience and workers' expectations is that 40% of retirees reported they retired before age 60, while only 8% of workers expect to be able to retire that early.

Despite the workers' low confidence regarding their ability to retire comfortably, “the good news is that automatic enrollments in 401(k) plans are administratively easier for employers who want to adopt them,” Mr. VanDerhei said. He said 20% of respondents would allow their 401(k) auto-enrollment contribution to increase to 10% to 14% of their salary, and another 20% were open to 15%.

“We realize that the default contribution rates in many cases aren't going to be sufficient. (Higher employee contributions) would allow the employee contribution rate to reach the levels that many financial professionals would consider adequate,” he said.

Eighty-one percent of workers whose companies offer a 401(k) plan participate in those plans.

Expectations vs. reality

The source of workers' expected income varies significantly from the sources of surveyed retirees' income, according to the survey.

While 91% of retirees report that Social Security provides a source of income, only 79% of workers expect income from this source. Also, while only 27% of retirees receive income from current employment, 79% of workers expect income from being employed after their retirement age.

Seventy-two percent of workers anticipate receiving income from an employer-sponsored retirement savings plan, while 27% of retirees now receive this type of source; the percentage of workers expecting to receive benefits from a traditional defined benefit pension or cash balance plan totals 56%.