By Linda Koco
Some retirement readiness data released this week by Voya Financial reads almost like a playbook on what Americans can do to increase their retirement readiness.
That includes owning annuities, life and long-term care insurance, as well as building up savings and investments.
For example, 83 percent of retirees who scored high on Voya’s Retire Ready Index said they had purchased insurance/investment products 10 or more years before retirement to ensure they would not run out of money.
By comparison, only 34 percent of retirees who were low scorers said the same. In fact, 60 percent of the low scorers in this group reported that they never did purchase such products, according to a consumer study that Voya commissioned on what being “retirement ready” means.
A high score equals between 7 and 10 points on a 10-point scale, according to the researchers. They described these Americans as “role models” for behaviors and attributes that can lead to greater preparedness. A middle score ranged from 3 to 7, while a low score was below 3.
Conducted in July in collaboration with Greenwald & Associates, Inc., the study polled two groups: more than 1,000 full-time workers and more than 1,000 recent retirees.
The combined, weighted scores revealed a major lack of preparedness for the survey groups as a whole. The average overall score for workers was 4.1 and for retirees, 5.5, meaning there is “room for significant improvement” among both workers and retirees, the researchers said.
The “needs improvement” assessment should come as no surprise to retirement professionals who have been keeping up with the flood of reports coming out on what is now commonly called the American retirement security crisis.
But there’s an attention-getter here, too. This is the study’s data on Americans who achieved the highest scores on Voya’s index. The data show that high achievers take certain steps that make them more prepared than others. That’s the playbook.
What did these high scorers do? Following are some examples.
Among workers, the highest scorers received a combined average score of 7. In terms of financial product ownership, they tend to own a wide range of products including annuities, according to the study.
Thirty percent said they own variable annuities and 29 percent report owning fixed or index annuities. That compares to just 5 percent and 6 percent, respectively, of annuity ownership among the lowest-scoring workers. What is surprising is that close to a third of the highest scorers claimed ownership of annuities, even though they are still working; this could be a sign that they have a watchful eye on the coming retirement years.
The highest scorers also said they own asset allocation funds (47 percent) and target date funds (34 percent). These higher-than-annuity percentages might be expected since the highest scorers do participate in retirement plans at work, where those types of funds predominate, and since those who are still working will likely gravitate towards exposure to multiple types of financial products.
But among the lowest scorers, it’s another story. Here, ownership of asset allocation (8 percent) and target date (6 percent) funds was only marginally higher than ownership of annuities.
Lesson one: High-scoring workers tend to build up financial product ownership.
The study pointed out that highest-scoring workers were more likely to view their employer-sponsored savings plan “as a major source of income in retirement.”
In fact, 36 percent said they contributed up to their employer match, and 28 percent up to the plan maximum. By comparison, among the lowest scorers, only 14 percent and 25 percent, respectively, laid claim to such contribution levels.
Lesson two: High-scoring workers meet or exceed the employer match in their retirement plan at work.
Voya’s take on product ownership: “Perhaps as a result of more active management of their investments, the highest-scoring workers were far more likely to own a range of investment products that offer additional ways to manage risks and potentially provide guaranteed income options in the future.”
Among retirees, the highest scorers ranked marginally ahead of their counterparts in the worker group with a total average score of 7.4. But these retirees were far more likely to rely primarily on their own assets for retirement income, the researchers said.
Some of those assets include annuities, workplace plans and IRAs, according to the study.
Regarding annuities, nearly two-fifths (39 percent) of this group said they own fixed or indexed annuities and nearly one-third (32 percent) said they own variable annuities.
That compares to just 29 percent and 30 percent for the two annuity types, owned respectively, among the highest-scoring workers discussed above. It’s also more than the annuity ownership of just 10 percent and 12 percent, respectively, among the lowest scoring retirees.
The findings track with a lot of annuity studies that put the average age of the annuity buyer, especially the fixed annuity buyer, somewhere in the mid-60s.
Lesson three: In retirement if not before, look for annuity products, especially those with guarantees.
The highest-scoring retirees also own asset allocation funds (43 percent) and long-term care insurance (29 percent). Those numbers are well ahead of the lowest scorers whose ownership of allocation funds and long-term care insurance are just 8 percent and 6 percent, respectively.
Putting it together, the researchers concluded that the highest-scoring retirees buy long-term care insurance to help manage future health care costs; annuities to provide potential for guaranteed income, and asset allocation funds “to help reduce investment risk in retirement.”
Lesson four: In retirement, use long-term care insurance, annuities and asset allocation to protect against risks to financial security.
Retirees place importance on products that could help address their retirement needs, the study said.
For instance 78 percent said it is important to have investment and insurance products that build guaranteed income; even 47 of the lowest-scoring retirees said this. In addition, 81 percent of those retirees said it’s important to have investments that offer protection from inflation, and 49 percent of the lowest scorers said the same.
Lesson five: Find out what is important to achieve retirement readiness.
According to the Voya study, a number of other factors also contributed to the retirement readiness of the “role models.” These include having more than $100,000 in life insurance, having savings and investments, and having a relationship with a financial professional.
Bottom line: Americans may need to improve their retirement readiness. If it’s a playbook they’re lacking, some role models might help.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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