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Despite having lofty retirement income expectations, only four in 10 older American workers have attempted to calculate how much they will need to save to meet those expectations. This failure to 'do the math' may explain why so many workers over age 40 are not currently saving enough to fund the retirement they are planning.
These findings are part of the Insured Retirement Institute's "Retirement Readiness Among Older Workers 2021″ report, which surveyed nearly 1,000 employed Americans aged 40 to 73 about their retirement planning and savings behaviors. According to the study, older Americans have not saved enough and now wish they had begun saving earlier or accumulated more money for retirement. To improve their retirement prospects, they now are faced with having to increase the percentage of their income that they save.
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Actively saving but undersaved
While the majority of older workers are actively saving, the group as a whole is undersaved with more than half of respondents indicating they have less than $51,000 saved for retirement and one-quarter of respondents saying they have saved nothing at all. About one in five respondents have saved more than $500,000. Fifty-seven percent are saving at a rate of less than 10 percent and 33 percent are saving less than 5 percent of their income.
"Among savers, savings rates are not nearly high enough for even the youngest respondents to grow their nest eggs to a level sufficient for meeting their income and budget expectations," said the report. "With 60 percent of respondents reporting annual household income of less than $100K and more than half saving less than 10 percent of their income, prospects for a secure retirement seem dim."
Fear of not having enough saved in retirement
The report further revealed a lack of confidence among a substantial portion of older workers about their financial prospects during retirement. Only 44 percent of respondents think they will have enough income throughout their retirement, and the same percentage believe they will not be able to remain independent, the report found.
Respondents were also unsure about their ability to pay for medical expenses and fund long-term care. However, the biggest area where pre-retirees lack confidence is in their ability to recover from a significant market correction. To meet this challenge, savers need to keep up with inflation, which may be difficult with current yields in government bonds and certificates of deposit, the report said.
More than half of respondents believe they will need more than $55,000 per year to live on during retirement and about one-third think they'll need more than $75,000 per year. Workers with the highest current income have higher expectations for their financial needs during retirement, while those on the lower end of the income scale expect to need less income during retirement.
Yet many want to retire at age 65 or younger
Despite a disparity in their retirement income expectations and their retirement savings realities, about half of respondents plan to retire at age 65 or younger. Consistent with inflated income expectations, workers also expect to have adequate income for not only basic expenses but also discretionary income for travel and leisure activities. Meanwhile, respondents had potentially unrealistic contingency plans in the event their savings run out, with 62 percent planning to rely entirely on Social Security and 38 percent indicating they will return to work. The report noted running out of money is a scenario most likely to happen many years into retirement when returning to work may not be feasible.
Despite some unrealistic and misaligned retirement savings behaviors and perceptions, many respondents understand the value of guaranteed lifetime income. However, the report found respondents aren't connecting the dots between guaranteed lifetime income and annuity products, and the percentage of those who have purchased an annuity is low. Income-focused annuities offered in defined contribution plans could help, and annuities purchased 10 to 15 years before retirement allow time for the invested amount to grow and produce more income for retirement, the report said. Interest among workers in annuities as plan options is high.
A large percentage of respondents (87 percent) believe it is important that the income from savings is guaranteed for life and three-quarters indicated they were likely to allocate savings to an in-plan variable annuity or guaranteed lifetime withdrawal benefit (GLWB). Twenty-six percent of respondents indicated that lifetime income is the most important trait of a retirement investment.
The report found 18 percent of younger respondents — those aged 40-45 — plan to purchase an annuity with their savings. This may be because younger workers tend to be more pessimistic about Social Security and believe it will not provide meaningful income during retirement, said the report.
The report found that retirement IQ among respondents was relatively low. When asked questions about inflation risk, sequence of return risk and safe withdrawal rates, respondent answers were what would be expected from guessing, the report said.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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