The Markets August 6, 2014

Optimism Index Shows Retirement Savings Worries

The Wells Fargo/Gallup Investor and Retirement Optimism Index slipped eight points in the second quarter to reach +29, driven by increased pessimism among retirees.
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The fall from +37 at the beginning of the year was driven largely by a 17-point decline (from +41 to +24) in optimism among retired investors, whose view of inflation and economic growth deteriorated during the quarter.

Still, the majority of investors surveyed by Wells Fargo and Gallup believe that the “American Dream” is still attainable, despite concerns about saving for retirement. Approximately 84% of investors who were surveyed note that the American Dream is achievable. According to the index results, investors view the dream as the ability to afford a home (93%) and enjoy a successful retirement (92%), while also having a good job prior to exiting the work force (92%).

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The survey revealed that 76% of Americans have a standard of living they consider to surpass that of their own parents. Nearly nine out of 10 non-retired investors said they are optimistic they will achieve the American Dream, versus 77% of retired investors. Researchers say this reflects the overall optimism of preretirees in the survey.

Joe Nadreau, head of innovation and strategy at Wells Fargo Advisors, notes that it’s not unreasonable for investors to openly pursue the American Dream. “The American Dream remains a pretty simple concept among investors: A home, a good job, and money to live on later in life,” he explains. Pursuing these goals is a reasonable formula for financial stability, he says. 

But despite the optimism about the American Dream, about half of the preretiree investors in the survey (47%) were either “extremely” or “somewhat” worried that they have not saved enough to be able to retire. Meanwhile, about a third (29%) were a “little worried,” while 24% were “not worried at all.”

Around 46% of all investors, including both the retired and non-retired respondents, were worried that they won’t have enough money to last throughout retirement. This includes 19% who were “extremely worried.” On the contrary, 20% were “a little worried,” and 29% were “not worried.”

“About half of investors worry about whether they’ll be able to retire, and if they do, whether they’ve saved enough to last through retirement,” Nadreau explains. “Regardless of where they are in their lives and how much they make, investors can allay these concerns with a clear saving-and-investment strategy.”

The index results also show most investors who own stocks are open to professional guidance, be it in person, on the phone, or collaboratively in the digital space. In fact, of the eight in 10 investors who reported owning individual stocks or mutual funds, 71% said they prefer consulting with someone who can give them expert or professional advice, compared to 27% who said they feel confident about
investing in the market on their own.

Overall, roughly one-third of investors (32%) sought more financial advice in the last two to three years, and nearly 40% indicate they would increase the advice they seek in the next two to three years.

The Markets August 6, 2014

Can Social Security Be a Silver Bullet?

Employers can quickly boost outcomes in their defined contribution (DC) retirement plans by improving participants’ Social Security withdrawal behaviors, a new analysis suggests.
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In a new report, Mercer and the Stanford Center on Longevity suggest retirement plan participants make a variety of common and costly mistakes when it comes to optimizing their retirement readiness. But one of the most widespread problems is a lack of awareness around how to most effectively time the start of Social Security payments.

The Mercer/Stanford analysis cites recent data from the Social Security Administration to show that the Social Security program provides 50% or more of all retirement income for two-thirds of U.S. retirees, and 90% or more of all retirement income for one-third of all retirees. With such a significant dependence on Social Security benefits, low- and middle-income workers who optimize those benefits can significantly improve their financial security in retirement, according to the report.  

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While there is unending minutia involved in the difficult calculation of what one’s monthly Social Security benefit may actually be, the main hurdle to increasing the benefit may also be relatively simple to overcome (see “It Is Difficult to Factor Social Security Into Retirement Planning”). Mercer and Stanford researchers suggest the overwhelming problem is that people simply draw Social Security too early—roughly half of all Americans now start Social Security benefits at age 62. As the report explains, this is the earliest possible age at which one can take Social Security, when the retiree will get the lowest amount of retirement income on a monthly basis.

This claiming behavior is suboptimal for people in average or above-average health, the report explains. For these people, retirement security can be enhanced substantially by just delaying the start of Social Security income. For example, delaying the start of benefits from age 62 to age 66 can increase annual Social Security income by 33%, the report says.

Near-retirees may be hesitant to defer income that can be accessed today, but the report suggests delaying to age 70 can increase annual Social Security income by as much as 76%, more than making up for the delay. Of course the ability to delay federal retirement dollars depends on the individual having sufficient savings from which to draw down or other sources of income, the report notes.

John Shoven, director of the Stanford Institute for Economic Policy Research, explains that it may be advantageous for U.S. workers to delay Social Security payments to age 70 even at the cost of depleting personal retirement savings in the early years of retirement. 

As Shoven explains, currently most Americans use retirement savings to supplement their social security income and start withdrawing from savings upon retirement—a method he describes as the “parallel” strategy. Instead of this, he advocates using a “series” strategy, in which retirees first draw down personal retirement savings to pay for living expenses and delay the start of Social Security benefits until age 70. In effect, retirees will use their retirement savings to “buy” a higher annuity from Social Security. This method is likely to result in higher amounts of lifetime income for retirees, Shoven says.

In today’s market, the effective “Social Security annuity purchase rate” is a much more favorable rate than the cost of annuities purchased from private insurance companies, Shoven adds. The reason is that Social Security’s delayed retirement credits were developed when interest rates were higher and life expectancies were lower compared with today. As a result, Social Security’s delayed retirement credits are more than fair actuarially for someone in good health, he explains.

Shoven says both single retirees and couples alike can increase their retirement incomes by several hundred dollars per month at age 70 if they delay Social Security benefits for the primary wage earner. The increase in retirement income from deploying this strategy translates to anywhere from $1,000 to $1,400 per month by age 90, he says. In some hypothetical examples, the gain in the expected value of total retirement income was $200,000.

A full summary of the Social Security research from Mercer and the Stanford Center on Longevity is available here. Mercer and Stanford researchers also recently collaborated on research examining participant statement best practices, available here.

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