Fed Study Shows Bleak, But Not Hopeless, Retirement Picture

By Linda Koco

New Federal Reserve Board research has found that 31 percent of nonretirees have no retirement savings or pension. That includes nearly a quarter of those older than 45.

In addition, 38 percent of the nonretired either do not plan to retire or plan to keep working as long as possible. And among lower-income Americans with household incomes of less than $40,000 a year, more than half (55 percent) said they plan to keep working as long as possible or aren’t planning to retire.

Insurance and financial professionals have heard eyebrow-raisers like that from many retirement-focused organizations and professional groups. The numbers are at the core of what is widely being called the American retirement crisis, or the lack of retirement readiness among many households that could lead to serious financial problems in retirement if not addressed.

What is significant about the newest findings is that they come from the 2014 Report on the Economic Well-Being of U.S. Households published by the Federal Reserve. The 108-page study looks at various financial issues faced by Americans, not only retirement. As the Fed’s researchers put it, the survey “collects information on households that is not readily available from other sources or is not available in combination with other variables of interest.”

It’s an independent perspective

In this case, a lot of the survey results corroborate findings that retirement industry researchers have been publishing in recent years.

For example, the Fed’s researchers wrote that the results “demonstrate that many individuals want to save for retirement, but also that many individuals — especially those with lower incomes — are failing to do so.” Even among retirement savers, they said, a majority have indicated that “they have no or limited confidence in their ability to manage their retirement investments.”

That resonates with some of the findings in the 2015 Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute and Greenwald & Associates. The RCS study reported that although overall retirement confidence has improved in the last two years, 28 percent of workers have less than $1,000 in retirement savings, and 64 percent believe they are “behind schedule” on planning and saving for retirement.

The Fed’s report drills down on numerous retirement issues of keen interest to advisors in the retirement planning market. Following are a few examples, plus some nudge questions for possible use in client discussions.

Not planning: Thirty-nine percent of working adults said they have given only “a little” thought or no thought at all to financial planning for retirement. While those closer to retirement indicated they have given thought to it, not even half of the nonretired ages 45 and older said they have given “a fair amount” or “a lot” of thought to it.

Nudge question: If clients say they have given little or no thought to retirement planning, can the advisor help trigger the thinking process by pointing to various surveys that highlight the risks of not planning?

No traditional retirement: Among those who are not retired and not out of the workforce on disability, only 22 percent said they expect to experience “traditional retirement” (work full time, then retire, then stop working). For 26 percent of this group, the “retirement plan” is to keep working as long as possible. An additional 12 percent said they don’t plan to retire, while others predicted that they’ll phase into retirement through reduced hours, part-time work or other means.

Nudge question: Might it help to point out that working long as long as possible may not be possible? For instance, the same survey found that 51 percent of the currently retired said they followed the traditional path. And an early 2015 study from the Bankers Life Center for a Secure Retirement found that 79 percent of baby boomers who retired earlier than expected did so for reasons not in their control (including health problems and layoffs).

Not saving: Many adults, particularly those with limited incomes, told researchers they have few or no financial resources available for retirement, so they are not saving. This includes the 31 percent of the nonretireds mentioned previously, who said they have no retirement savings or pension whatsoever.

Nudge question: The same survey found that almost 90 percent of the age 45-and-older group do have some retirement savings, so might this finding provide younger clients with a reason to forge ahead and try to save?

Defined contribution plan dominance: Of those who do have savings, 47 percent said the money was in defined contribution plans, while only 22 percent participate in a traditional defined benefit pension plan through an employer. The other savings vehicles are: savings outside of a formal retirement account (37 percent), individual retirement account (29 percent), real estate or land to sell/rent to generate retirement income (15 percent) and retirement savings through business ownership (7 percent).

Nudge question: The survey did not show life insurance or annuities in its savings vehicle list, but might it help for the advisor to point out to clients that those products are probably in one of the categories that did get on the list? That would help give context to the role of insurance in retirement planning.

Lack of access and knowledge: Forty-two percent of workers who do not contribute to a defined contribution retirement plan said it is because their employer does not offer a plan. In addition, 20 percent said they cannot afford to contribute and 15 percent said they are unsure of the best way to invest their money in the plan.

Nudge question: If they can’t or don’t’ know how to participate in a workplace plan, might these clients be interested in investing through a plan arranged by the advisor to fit their needs and budget?

Not hopeless

Many surveys on retirement readiness and awareness paint a fairly bleak picture of financial struggles that American adults may face in retirement. However, the situation is not hopeless.

For example, the Fed data show that 41 percent of the nearly 6,000 adults said their spending in the past 12 months was less than their income, and 44 percent said they had set aside an emergency or rainy day fund to cover their expenses for three months.

Finally, there was this: Fifty-seven percent of a smaller group (2,600) said they are saving for retirement.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].