Data & Research June 27, 2016

Americans Worried About Funding Longevity

Americans surveyed said they would be more willing to seek help from a financial professional if he or she helped them find solutions that could create guaranteed income for life and helped plan for and fund a longer life.
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While Americans are optimistic about the prospect of living an average of 30 extra years, 70% feel financially unprepared to live to 100 and beyond, according to The Gift of Time, a new study from Allianz Life Insurance Company of North America.

Millennials and Generation X have time on their side when it comes to pursuing their dreams, but that gift comes with significant angst. More than three-quarters (79%) of Gen Xers reported feeling financially unprepared for living a longer life, while 74% of Millennials had the same concerns. Baby Boomers are not immune to worry either—57% reported that they feel financially unprepared.

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When respondents were asked to finish the sentence, “following your dreams is all well and good, but you need to have…,” the top two barriers chosen were “enough money” (57%) and “a good financial plan” (50%). The biggest regret reported (or potential future regret for Millennials) was not saving more money (52%) which ranked above not traveling more (38%) and not spending more time with their kids (32%).

As respondents considered their extra years, 45% said that “uncertainty” most closely described their feelings about the future. This uncertainty is echoed by the fact that more than half (51%) identified “having enough money to last my whole life” as a very big problem when they thought about living to age 100.

“The Gift of Time confirms that having a solid financial plan addressing longevity can remove major barriers for many Americans, allowing them to take risks that ultimately lead to a more fulfilled life,” says Allianz Life Vice President of Consumer Insights Katie Libbe.

NEXT: Solutions for planning for longevity and using a financial professional

The study also showed people’s awareness of solutions that could help.

According to the study, more than half (51%) of respondents believed they would need to better plan their spending and saving, or live more modestly to fund all the things they want to do in life. More than one-third (37%) even acknowledged that they may need to work longer/retire later to meet their financial needs. To make the most of their 30 extra years, respondents found it important to change the amount of money they save, how they fund their entire life (including short-term goals), and the level of discipline they need to follow a financial plan.

In addition to the solutions people identified when planning for longevity, the study found that having a financial professional could add support and reassurance. Respondents who had a financial professional reported being happier (79%) with their major life choices (such as their profession and when/where they worked or didn’t, etc.) compared to 64% of those who were happy with their major life decisions but did not have a financial professional. Despite that fact, the majority (72%) of respondents reported not having a financial professional. But these respondents would be more willing to seek one if the financial professional helped them find solutions that could create guaranteed income for life (47%), helped plan for and fund a longer life (34%), and helped with finances throughout life stages (31%).

Americans also support living life in a new, nontraditional order—especially if the barriers holding them back are addressed. When asked what got in the way of following a different approach for when and how they made major life decisions, “worries about money” was the top choice for 46%, “life events” got in the way for 33%, and 22% cited “lack of a clear plan for how to go about it” or “fear of failure” getting in their way. With the right longevity plan, people who avoid making alternative choices because of money could reconsider their future, as many respondents recommended doing. Sixty-five percent admitted that it was better to explore, experiment and travel earlier in life by changing when and how they learned, worked, married or raised kids. 

The Gift of Time found that instead of taking a traditional path (going to school, working, getting married, having kids and retiring), almost half (49%) of respondents were open to a nontraditional model that was unique to their interests.

For more information about the study, visit www.allianzlife.com/TheGiftofTime.
Data & Research June 27, 2016

Federal Thrift Savings Plan Offers Important DC Education Lessons

A new analysis uses data on all active employees of the Federal Reserve System to examine contribution behavior in the Thrift Saving Plans—granting insight into the behavior of DC plan populations with genuine financial expertise. 
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The Pension Research Council recently examined the savings behavior of Federal Reserve System employees within the Thrift Savings Plan, linking the research to “a unique employee survey of economic/demographic factors including a set of financial literacy questions.”

The results are presented in “Employee Financial Literacy and Retirement Plan Behavior: A Case Study,” which finds, not too surprisingly, that Federal Reserve employees are substantially more financially literate than the Thrift plan population at large. This makes sense, researchers note, given the Federal Reserve’s key economic oversight role and the fact that the Thrift Savings Plan covers significant numbers of federal government employees doing many different types of daily work.

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Zooming in on the Federal Reserve employees—who also widely have access to defined benefit pension planning options—researchers find widespread enthusiasm about the Thrift defined contribution (DC) plan, to the extent that Federal Reserve employees “contribute 3% more of their earnings to the plan than do the less knowledgeable.”

Federal Reserve employees further hold significantly more equity in their accounts than the general population, researchers find, underscoring the notion that knowledge about the markets is one of the most powerful tools to overcome emotion-based decisionmaking. 

Adding to the findings, the researchers also looked at a sample group of Fed employees who had completed a learning module about retirement planning and financial wellness. One year after completing the module, these employees were clearly much more likely to have started contributing to the plan if they had not already started, and they were also less likely to have stopped contributing to plan if they had previously opened an account.

According to the researchers, this shows financial wellness and retirement education can be beneficial even for employees who are already ostensibly knowledgeable about finances.

NEXT: Examining the findings 

This analysis is particularly informative given its unique data set, the researchers suggest. “These data were collected in connection with an online employer-provided educational module which included a survey inquiring about Federal Reserve employees’ financial literacy,” they explain. “The linked data allow us to study the saving and investment patterns of the more- versus less-financially literate segments of employees who were offered the opportunity to save in a defined contribution plan.”

The researchers combined additional administrative records with the survey data evaluating workers’ financial knowledge. With this process, they could “examine whether financial literacy is associated with higher participation and contribution rates in the employer plan. We could also evaluate, for those who participate in the program, whether financial literacy influences saving responses after exposure to a learning module.”

Clear results emerged from the analysis: “An important contribution of this research is that we show that participation in the learning module had large and significant effects on the retirement saving decisions of Federal Reserve employees. Of those not participating in the retirement savings plan at baseline, employees who took the module had a 4.6 probability of starting to contribute post-module, or 40% higher than their counterparts.” Of those who stopped participation, “those who took the module had a 3.8 percentage point change of stopping contributions, or half that of their counterparts.”

“We also find that those who took the module contributed 1.0 percent more of their salaries post module, for an improvement of 12 percent, and they boosted their equity share by 3.7 percentage points (compared to a baseline of 57.2 percent, or a 6.5 percent change),” the analysis shows. “When we attenuate potential sample selection issues using inverse propensity weighting, the increases in contributions and equity shares are even larger. Those taking the nodule contributed 11 percent of their salaries, more than doubling their pre-module rates, and increased their equity share by 6.3 percentage points, for an 11 percent change.”

The research concludes that, “unless employees understand their plans and the incentives embedded in them, they are unlikely to value them, save, invest, and manage their retirement portfolios appropriately. For this reason, employers have an interest in providing financial education to help workers better understand and make better decisions about their retirement savings.”

More information on the Pension Research Council is here. 

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