Data & Research November 1, 2018

Many Retirees Fail to Consider Effect of Taxes

As a result, they may have lost the opportunity to save six years’ worth of income in retirement, according to a Nationwide Retirement Institute survey.

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Thirty-seven percent of retirees admit they did not consider how taxes would impact their retirement income, a Nationwide Retirement Institute survey found. As a result, the institute says, they may have lost the opportunity to save six years’ worth of income in retirement.

Sixty percent of pre-retirees, 70% of recent retirees, and 75% of those who have been retired for more than 10 years say they are only somewhat knowledgeable or not at all knowledgeable about tax planning.  Fifty-two percent of pre-retirees and 47% of recent retirees wish they better understood how their income in retirement will be taxed.

Fifty-one percent of future retirees say they are only somewhat or not at all knowledgeable about how tax brackets work, and 40% of future retirees did not know that someone in a high tax bracket might pay two to three times more in taxes than someone in a lower tax bracket.

Forty-six percent of recent retirees wish they had better prepared for paying taxes in retirement, and 24% said they have paid several thousands of dollars more in taxes than they had expected.

Eighty-two percent of those nearing retirement, 64% of those recently retired, and 62% of those retired for more than 10 years want to learn about taxes. Among those who work with an adviser, 85% of those nearing retirement, 82% of those recently retired and 68% of those retired over 10 years expect their adviser to help them plan for taxes in retirement. Thirty-eight percent of future retirees said they would switch advisers for someone who could help them plan for taxes in retirement.

“Building tax flexibility into a retirement income plan is crucial,” says Eric Henderson, president of Nationwide’s life insurance business. “Doing so allows you to use different types of investments and retirement accounts to potentially avoid higher tax brackets. Financial advisers can provide a fact-based estimate of taxes in retirement and a unique plan to address those costs.”

Among those retired more than 10 years, Social Security is their primary source of income for 49%. Among recent retirees, this is true for 43%. Twenty-five percent of those approaching retirement say that their 401(k) will be their primary source of income, followed by their pension (22%) and Social Security (20%).

The Markets November 1, 2018

Stock Market Volatility Brings Predictable 401(k) Trading Spike

Preliminary data shared by Alight Solutions shows the firm’s 401(k) trading index spiked on Monday October 29; investors making moves shunned growth assets and paid premium prices for fixed income.

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The second half of the month of October brought renewed volatility in U.S. and global equity markets.

According to data shared by Alight Solutions, after several weeks featuring relatively large price swings for major indices including the DJIA, S&P 500 and the NASDAQ, 401(k) trading activity jumped on Monday, October 29.

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That day, trading was 2.26-times the normal level, according to the Alight Solutions 401(k) Index. Important to note, this is a relative spike versus normal daily trading and only represents about 0.04% of total 401(k) balances in the U.S.

Still, the trading spike represents an important teaching moment, says Rob Austin, head of research at Alight Solutions. He points out that this was the first “high” day of trading since mid-April 2018, defined as a day with greater than two-times the normal trading level.

“When trades were made, 401(k) investors moved away from equities to the relative perceived safety of fixed income,” he tells PLANADVISER. “Alight also saw higher-than-normal call volume to our call centers for calls related to 401(k)s.”

Ill-time trading is hard to shake

For context, Austin says that he was actually surprised that it took this long to see a trading spike in response to recent equity market volatility. In a sense it is actually not a good thing that these investors were able to hold off on trading towards safe assets until the end of a pretty rocky month.

“It would have been better for many of these people to have made their trades earlier in October, when volatility first spiked,” Austin says. “With this later trading, these individuals are selling at a time when their assets prices are even more depressed. It’s ironic that the knee jerk reaction would have been better. Instead, we saw an extended run down and only then did people trade. That is clearly sub-optimal behavior.”

Echoing an increasingly popular phrase in the mouth of asset managers these days, Austin reminded readers that the only person who gets hurt on a roller coast is the one who jumps off.

“We are always encourage people to try to take emotion out of 401(k) trading decisions,” Austin says. “For your audience, we would emphasize the importance of offering plan participants the ability to implement automatic re-balancing.”

Austin says the growing popularity of target-date funds (TDFs) and asset-allocation solutions among plan participants has not had a big impact on ill-timed trading behavior as measured by the Alight index.

“Even with growth in TDFs and such solutions, the sub-optimal trading is still there,” Austin warns. “People still trade out of the TDFs based on the significant equity percentage in them. And just as with other types of funds, when individuals trade out of TDFs, they usually do not buy back their shares right away. As we know, the best days tend to always follow closely after the worst days, so it’s really easy for this group of ill-timed traders to miss the rebound.”

Soothing words from J.P. Morgan economist

On the same day Austin offered this analysis, J.P. Morgan Asset Management published its 2019 to 2029 capital market assumptions report, providing some long-term context in which to contemplate recent volatility.

According to David Kelly, the firm’s chief global strategist, the J.P. Morgan assumptions suggest increased global financial stability for the next decade and beyond. He says this is a good thing insofar as it means recessions and downturns are likely to be much weaker and shorter lived relative to the Great Recession of 2008 and 2009. But on the flip side, this also means that growth is likely to be slower—and that there will be fewer opportunities to exploit market rebounds.

“Even though we are 10 years out of the financial crisis, people still think about the prospect of a downturn as a world-altering event and assume a recession will mean they are going to lose 50% of their assets, because that is what happened last time,” Kelly tells PLANADVISER. “However, our analysis finds that global markets are becoming more stable, not less.”

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