New survey results find that most workers over age 40 have inadequate retirement savings and are not saving enough to catch up, yet most expect retirement income at a far greater level.
While three out of four workers are saving for retirement, the survey by the Insured Retirement Institute finds that 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. According to the findings, about a quarter of respondents have no retirement savings, while half have saved less than $250,000, with half of them having less than $50,000 saved. Only about one in five respondents have saved more than $500,000.
With 60% of respondents reporting annual household income of less than $100,000 and more than half saving less than 10% of their income, IRI suggests that the “prospects for a secure retirement seem dim.” The survey did find, however, that there is a bit more aggressive saving occurring among those ages 56 to 66, indicating that catch-up contributions may be part of their saving.
Unrealistic Expectations
Still, their retirement saving behavior does not support the retirement income expectations of many workers, IRI notes. A third think they will retire before age 65, and therefore, see reduced Social Security benefits. More than half of workers believe they will need at least $55,000 in annual retirement income.
Meanwhile, across several measures of retirement preparedness, workers of all ages are not confident. Most fear they will not have enough income, will not be prepared to transition to retirement, will not have enough money for medical expenses or long-term care should the need arise, and may not be able to live independently for the entirety of their retirement.
Additionally, only 4 in 10 workers have attempted to calculate how much they will need to save to meet retirement income expectations, so they are not connecting income potential to their savings. In two of the older age groups (46-50 and 62-66), only about one in three have calculated how much they will need.
“Older workers are under saved and regret that they have not saved more or wished they had started saving earlier,” notes Frank O’Connor, IRI’s Vice President for Research and Outreach. “Improving retirement prospects requires an increase in the percentage of income saved,” he adds, suggesting that the findings highlight the importance of plans not only auto-enrolling but auto-escalating plan participants to increase savings rates.
Income vs. Returns
The findings also suggest that some workers are in favor of considering retirement investment options that guarantee income for life, such as annuity products being made available in DC plans. Interestingly, however, the age 46-50 cohort appear to be more interested in a good rate of return (ROR) on investments than guaranteed monthly income or principal safety.
In contrast, the youngest age cohort flips back to valuing the income more than ROR. Here, 7 in 10 workers of the youngest age cohort (age 40-45) say they are “very or somewhat likely” to allocate a portion of their plan to annuities. The study observes that younger workers tend to have less belief that Social Security will provide meaningful income and more distrust of markets, having come of age around the time of the 2008 financial crisis.
When asked about the importance of having their retirement income sources (besides Social Security) guaranteed to last for their lifetimes, nearly 9 in 10 workers agreed that they want their sources of supplemental retirement income to last for their and their spouse’s lifetimes.
Connecting the Dots
Yet, the IRI notes that this highlights challenges faced by the retirement income industry, as workers aren’t connecting the dots between “annuities” and “lifetime income.” The study notes that generating meaningful income from an annuity requires a substantial investment. For example, it shows that an annuity with a 4% lifetime withdrawal benefit will only generate $333 in monthly income for each $100,000 invested.
The IRI suggests that the lifetime income disclosure provision in the SECURE Act should help workers better understand how their retirement balances can deliver monthly income. A final regulation requiring retirement plans to illustrate how much monthly lifetime income a retirement account balance could provide is expected later this year. In earlier surveys conducted by the organization before the passage of the SECURE Act, plan participants indicated these illustrations would prompt them to increase the percentage of income they contribute to their plans.
The survey was conducted in March 2021 to gauge the retirement savings behaviors, retirement preparation steps, retirement expectations and retirement investment preferences of nearly 1,000 workers between 40-73 years old.
