If ever there were any doubts about the benefits of having a formal financial plan to help prepare for retirement, a new study by T. Rowe Price puts that to rest.
According to the firm’s report, individuals with a formal financial plan were found to have two to four times more wealth when entering retirement compared to those without one. Individuals with a financial plan are also more likely to contribute more toward their retirement and work with a financial advisor.
The findings are based on T. Rowe Price’s annual Retirement Savings and Spending study, which surveys a national representative group of 401(k) participants.
The report also found that demand for financial planning services is strongest among individuals who are within one to five years of their retirement date. In addition, nearly 4 in 10 respondents (38%) over the age of 50 indicate that not having enough money was their most significant obstacle to starting retirement planning.
The study comes as the Pew Research Center estimates that 10,000 Baby Boomers are expected to turn age 65 each day until 2030. Unlike the saving phase of retirement, the spending phase is more complex and requires the coordination of many key decisions such as Social Security, Medicare, tax minimization, and legacy planning, T. Rowe Price notes.
Consequently, it’s not surprising that among the respondents in the study, 64% of Baby Boomers reported moderate-to-high levels of stress about their retirement savings.
“The retirement industry has historically focused on helping savers climb the hill of contributing toward their future retirement,” said Bill Meyer, head of Retiree, Inc. at T. Rowe Price. “However, given the number of complex financial decisions facing retirees on the other side of that hill, the need for better planning and guidance through retirement is clear.”
Additional insights from the report include the following:
- Survey respondents with a formal plan reported 60% higher confidence about their financial outlook.
- 70% of pre-retirees who responded to the survey were in the process of forming a retirement plan or thinking about it.
- 60% of respondents indicated that their employers are the primary source for financial education and guidance.
- 40% of respondents stated that they are willing to engage a financial advisor and are interested in using digital planning tools to help with income, savings and spending.
Limited Knowledge = Uninformed Decisions
Meanwhile, among pre-retirees, awareness is low when considering investment products designed to support investors’ retirement income needs. According to the findings, 35% to 56% of pre-retirees reported that their understanding of investments—such as managed accounts, fixed income products, target date and managed payout funds—were not very good or not good at all.
In addition, 65% of pre-retirees are unaware of how much they can safely withdraw from their savings to last through retirement. Even estimates from knowledgeable pre-retirees may not be accurate, the report further observed.
Plan sponsors can meet this need by providing digital services and financial wellness programs that address the impending needs of pre-retirees and families in retirement, the report suggests, adding that these types of solutions are not only valued by participants but could also lead to better retirement outcomes. Additionally, financial advisors are well positioned to offer support in developing a comprehensive retirement strategy.
“Advances in technology have given investors greater access to effective and convenient solutions for personalized financial planning, and we expect the demand to increase, especially for tools involving retirement income,” Meyer further emphasized.
Fielded annually since 2014, the 2023 survey was conducted between July 24–Aug. 13, 2023, among 3,041 401(k) participants who are either full-time or part-time workers who never retired and are contributing to a 401(k) plan or are eligible to contribute with a balance of $1,000 or more. The survey also included 1,176 retirees who have retired with a Rollover IRA or left a 401(k)-plan balance.
The full report can be found here.
