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Pre-Retirees More Concerned About Falling Short in Retirement

Pre-retirees worry more than retirees about not having enough income in retirement, changes in Social Security benefits and low interest rates, while retirees worry more about health care and staying active, new research shows.

According to MassMutual’s Retirement Income Study, retirees are confident their retirement income will last through their lifetime and they will have enough money to meet their retirement lifestyle goals, with 9 out of 10 retirees saying they feel confident, compared with just over half of pre-retirees.

When asked about their level of concern, 78% of pre-retirees said they were either very or somewhat concerned about falling short on income in retirement, while only 51% of retirees said the same.

In addition, the study shows that pre-retirees worry most about not having enough money to enjoy themselves (28% vs. 7%), while retirees indicated that they are most concerned about health care costs (29%).

“While we’re working, many of us think about retirement in terms of our leisure pursuits, a kind of permanent vacation that requires more disposable income,” explains Tom Foster Jr., Head of Retirement Plans Practice Management with MassMutual. “Retirees’ experience tells us that health concerns become increasingly prominent, especially as many retirees begin experiencing health issues and their subsequent costs.”

Confidence Level

Not surprisingly, respondents with less than $250,000 in assets, those less knowledgeable about managing their savings and investments, and those who display so-called bad investment behaviors – such as borrowing from their 401(k) or suspending contributions – are more likely than their counterparts to be concerned about falling short on income in retirement.

Retirees’ confidence may stem from finding they need less income than many pre-retirees anticipate. According to the study, 60% of pre-retirees expect to need at least two-thirds or more of their pre-retirement income to live comfortably in retirement, while only 44% of retirees find that to be the case.

In addition, more than a third of pre-retirees believe they will need 75% or more of their pre-retirement income in retirement, while a third of retirees report needing less than 50%.

“While many retirees can manage their expenses to lower income levels in retirement, the rising cost of care may steadily reduce their lifestyles as they age,” Foster notes. “Once you’re older, it may be impossible to make up for any increasing income needs by simply tightening your belt. It’s far better to err on the side of having more rather than less income than you anticipate needing, especially as costs for care continue to escalate.”

Additionally, 6 in 10 pre-retirees expect that at least 50% of their retirement income will come from their 401(k) plan, while only 32% of retirees reported the same.

Pre-retirees were also found to be more inclined than retirees to say they wish they had started saving for retirement sooner. According to the study, 84% of pre-retirees would have started saving sooner, compared with 55% of retirees. Not surprisingly, those views were more likely to be expressed by those with less than $250,000 in assets or respondents who diverted money from their 401(k) or other retirement plan before retirement through a loan or withdrawal, or who put off contributions.

The internet-based survey was conducted in January 2018 by Greenwald & Associates on behalf of MassMutual, and polled 801 retirees who have been retired for no more than 15 years and 804 pre-retirees within 15 years of retirement. Pre-retirees were required to have household incomes of at least $40,000, and all retired respondents had at least $100,000 in investable assets and participated in making household financial decisions.

Sources of Income in Retirement

On a related topic, a new report by Hearts & Wallets identifies often overlooked income streams for groups of future retirees and finds that retirees may be much more dependent on certain income in retirement than national averages indicate.

“Retirement & Funding: Building Informed Expectations about Sources of Income in Retirement” finds that surprises in retirement income sources range from oversized roles for dividends and taxable brokerage accounts to extremely high expectations for retirement accounts.

Drawn from Hearts & Wallets’ Investor Quantitative Database on U.S. retail consumer attitudes, the report notes that dividends from stocks and mutual funds on a national level represent only 4% of retirement income for all current retirees. But when focusing only on the subset of retirees who have this income and excluding retirees without any income from stocks and mutual funds, the story is much different.

For retirees who have dividends, this represents nearly a fifth of their income (19%) across all asset levels and more than a third (34%) of income for retirees with $2 million and more in investable assets. Pre-retirees with dividends anticipate that 16% of income will be obtained from this source, with the wealthiest future retirees saying it will represent 27% of their income.

The wide variance between national averages and specific groups is also seen in taxable brokerage accounts, the report notes. Nationally, taxable brokerage account withdrawals represent only 2% of income for all retirees. Yet for retirees who take withdrawals from such accounts, this source jumps to 21% of income.

Work and Retirement

Withdrawals from retirement accounts follow a similar pattern, but the main difference is the expectations that pre-retirees have for tapping into such accounts. For example, the report indicates that pre-retirees expect their retirement account withdrawals to be four times as large a source of income as they are for today’s retirees — 16% versus 4%. Moreover, twice as many future retirees think they will have retirement account income as currently have such income among all retirees nationally. For retirees who have these accounts, retirement account withdrawals represent about 22% of income, the report notes.

At the national level, employment is an important source of income in retirement, representing 8% of income for all current retirees or their spouses. But focusing specifically on retirees who have this income source, employment jumps to 36% of their income, the report shows.

For future retirees, employment is anticipated be a bigger piece of the retirement pie at 10% nationally, and 13% for households with under $100,000 in investable assets. When focusing on future retirees who say they plan to work in retirement, this income source jumps to 25% of income for all asset levels.

Real Estate Resources

Real estate income is another source that appears insignificant (1%) at the national level for all current retirees, and it is only 3% for all future retirees. But for current retirees who derive some income from real estate, this resource represents 22% of income for retirees at all asset levels.