Data & Research July 10, 2018

A Mere 6% of Retirees Continue Working

But more than half of pre-retirees expect to hold down a job, PGIM found in a survey.

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While more than half of pre-retirees expect to continue working in retirement, a mere 6% of retirees actually hold down a job, PGIM Investments, the investment business of Prudential Financial, found in a survey.

Fifty-two percent of pre-retiree Baby Boomers, 58% of pre-retiree Gen Xers, and 43% of pre-retiree Millennials expect to work part-time or full-time during retirement. PGIM says the high expectations for work may be due to fears of Social Security benefits being reduced—or not continued at all. Only 51% of Millennials expect to receive Social Security.

“While changes in retirement expectations are often driven by pure economics, these study results also suggest a mind shift in how people are thinking about retirement,” says Stuart Parker, president and CEO of PGIM Investments. “To help them bridge this gap, the asset management industry will need to rethink the way it does business and bring products and services in line with changing customer needs.”

The survey also found that pre-retirees are relying more on how much money they have saved than reaching a certain age to decide when to retire, with this being the case for 50% of Gen Xers and 62% of Millennials. In contrast, the majority of current retirees decided when to retire based on their age and eligibility for Social Security and other benefits.

Twenty percent of Millennials and 9% of Gen Xers want to start a business in retirement. Additionally, 39% of pre-retirees would like to volunteer in retirement.

Fifty-one percent of retirees say they are “living the dream.” On average, this group started saving six years earlier (age 40) than those not as enchanted with retirement (age 46). They are also likely to have pensions and other sources of income, to work with a financial adviser, to be more willing to take risks and to be more knowledgeable about investments.

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The top lessons retirees would like to pass on to pre-retirees are save more, start saving earlier, and plan on retiring later.

Social Security will be the most critical source of income for 61% of pre-retirees. However, only 70% of Gen Xers and 51% of Millennials expect Social Security benefits when they retire.

While Millennials are the least likely to rely on Social Security for retirement income, nearly one in three are not saving anything for retirement. More than one-third say they do not see any point in saving for retirement because anything can happen between now and then. Additionally, nearly one in five Gen Xers are not saving anything for retirement.

This lax approach to retirement saving is surprising, given the fact that Gen Xers think they will need $2.5 million to retire, and Millennials, $1.1 million. Fifty-three percent of pre-retirees are unsure how much they will need to retire, and they give themselves a grade of “C” in terms of their retirement preparedness.

Fifty-one percent of retirees said they retired earlier than they had planned, with 50% of this group saying it was more than five years before their target date. In many cases, the reasons were involuntary, including health problems (29%), layoffs or restructurings (14%), the need to care for a loved one (13%) and the inability to find a new job (10%).

Prudential’s 2018 Retirement Preparedness Survey can be downloaded here.
The Markets July 10, 2018

Pension Buyout Market Strains Should Lead DB Plan Sponsors to “Hibernate” Plans

Mercer suggests pension sponsors should now focus on the shakeout that lies ahead, with the potential bifurcation between liabilities sold to insurers and the hard stuff kept on pension balance sheets, by using hibernation investing.

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Robust bulk pension buyout activity led to an increase in deal flow of $23.3 billion for 2017, composed mostly of retiree-only buyouts, according to Mercer.

The Mercer/ CFO Research 2017 Risk Survey indicated that 55% of defined benefit (DB) plan sponsors are likely or very likely to annuitize some or all of their obligations in the next five years.

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In a new white paper, Mercer says that due to this activity, it has seen some strains based on current demand. “The insurance market for deferred benefits in particular is feeling pressure, and we see this challenge becoming more widespread in the near future,” Mercer says.

According to “Pension Investing for the Long Term: An Alternative to Risk Transfer,” as more marketable obligations—such as those for in-pay retirees—are transferred to insurers, residual DB plans will have unusual and idiosyncratic features that make them more difficult to manage. This latter challenge of steady-state pension management will drive pension investing to a “hibernation” focus for many.

Mercer suggests pension sponsors should now focus on the shakeout that lies ahead, with the potential bifurcation between liabilities sold to insurers and the hard stuff kept on pension balance sheets. As more sponsors look to self-insure their obligations, hibernation investing will begin to dominate the pension investment landscape. Mercer explains that hibernation investing involves putting plans in a steady state while winding them down over time and/or gradually preparing for pension risk transfer over a longer period of time. Although very similar to traditional liability-driven investing (LDI), hibernation investing will not be as simple—it brings its own set of challenges and risk-management opportunities.

For a plan entering a hibernation period, four key priorities come to the fore, according to Mercer:

  • Minimize residual expenses, whether investment, Pension Benefit Guaranty Corporation (PBGC) premiums or other administrative costs;
  • Maximize their asset returns in a low-risk state through active management and diversified sources of return where appropriate;
  • Minimize residual risk in the end state through a tailored investment strategy by keeping asset and liability returns as closely aligned as possible, as well as focusing on demographic risks; and
  • Ultimately, minimize the capital deployed in excess of pension obligations to keep the plan self-sufficient in a low-volatility state, accounting for the plan’s residual costs and risks.

These priorities involve several tradeoffs that will lead to different outcomes for different sponsors, according to Mercer. The higher the net investment return generated, the lower the need for capital. Similarly, the tighter the hedge in the investment strategy, the lower the downside risk and, therefore, the lower the need for excess returns and/or capital commitments. So the first steps in a successful hibernation strategy are to determine the target parameters around these factors and then manage to the resulting benchmarks effectively.

The white paper discusses strategies and considerations for the four priorities and may be downloaded from here.

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