Data & Research October 22, 2015

Numerous Factors Drag Down Americans' Retirement Goals

As Americans face a retirement income shortfall, it’s critical to understand how savings translate to income.
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Even those Americans closest to retirement age still are not saving enough to meet their retirement income goals, according to the latest BlackRock Global Investor Pulse survey. Overall, 60% of Americans are actually saving for retirement: 65% of men, but just 55% of women.  Saving to live comfortably in retirement is their most important financial priority, Americans say, after saving money in general—yet most (71%) are concerned they won’t be able to reach that goal.

The reality is that Americans of all ages face a considerable shortfall in terms of the income they want in retirement compared with the income their savings can actually generate. Baby Boomers (age 55 to 65), for example, say they want $45,500 in annual income in retirement—but they have accumulated an average savings of $136,000, an amount that would generate just $9,129 in annual income, leaving them short by $36,371 per year.

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Daily living expenses weigh on Americans, BlackRock says. Americans have complicated feelings about their prospects for retirement—confident in their investment decisions, yet worried about the prospect of living comfortably. While many need to increase their savings to meet their retirement goals, they often feel pressure from bills and monthly costs. The biggest factor in influencing retirement savings is overall assets, BlackRock says, with 68% of Americans finding it hard to pay bills and save for retirement at the same time.

NEXT: More years in retirement and too much cash

Another challenge is increased lifespans. And longevity means longer retirements, which means many investors are worried about having enough for all those years. Others still are overconfident—feeling they are making the right investment decisions, even though their current investments will not yield the income they expect. One of the most common obstacles: holding too much cash. A peek into investor portfolios shows that more than half of respondents (57%) believe their holdings are diversified, even though they hold 65% of their wealth in cash.

Savers are still in the process of evolving to investors, BlackRock says, and although Americans can be quick to embrace new financial methods and technologies, their underlying strategies and money attitudes don’t always follow as quickly. Online banking is widely adopted, and most people use the Internet to help with financial decisions, but when it comes to investing, Americans have difficulty adjusting to today’s realities of longer lives and lower yields.

The BlackRock Global Investor Pulse survey interviewed 31,139 respondents, in 20 nations, including Canada and the U.S., which included 4,213 respondents. No income or asset qualifications were used in selecting the survey’s participants, making it a truly representative sampling of each nation’s entire population. The survey was fielded from July to August by the Cicero Group, an independent research company.

The BlackRock Global Investor Pulse survey can be accessed through BlackRock’s website.

Data & Research October 22, 2015

401(k)s May Result in More Successful Retirement than DBs

The result depends on an employee’s salary level and the level of pre-retirement income to be replaced.
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Focusing on employees who are eligible for participation in a retirement plan for at least 30 years, the Employee Benefit Research Institute (EBRI) found that a final-average defined benefit (DB) plan with an accrual rate of 1.5% is more likely to provide “successful” outcomes for lower-income workers when the employer-provided retirement benefits are added to the expected Social Security benefits.

However, as income increases, a voluntary-enrollment 401(k) plan has a higher probability of producing a successful outcome than this type of defined benefit plan. A voluntary-enrollment 401(k) plan is even more likely to produce a successful outcome than the final average defined benefit plan when “success” is defined as a real replacement rate greater than 60% of pre-retirement income.

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For the analysis, EBRI conducted projections for the percentage of “successful” retirements for 401(k) participants, by income quartile, for those currently ages 25 to 29 in a voluntary-enrollment 401(k) plan. The analysis assumes that workers retire at age 65, and that all balances are converted into an inflation-adjusted annuity at an annuity purchase price of 18.62 at that point. The annual income provided by this annuity in the first year of retirement is added to the simulated Social Security retirement benefit provided for the worker (spousal benefits are not included), and the combined retirement income is expressed as a percentage of the salary the worker was simulated to have earned at age 64. 

NEXT: Who fares better with 401(k)s?

For the lowest-income quartile, EBRI found 86% of the workers currently ages 25 to 29 who will have more than 30 years of eligibility for participation in a voluntary-enrollment 401(k) plan are simulated to be able to replace at least 60% of their age-64 salary from their annuitized 401(k) accumulations and Social Security. In contrast, if these same workers (with similar wage and job turnover) are in a final-average DB plan with a 1.5% accrual rate, the probability of “success” increases to 99%. This differential in favor of this specific type of DB plan remains positive for the second- and third-income quartiles (97% vs. 83% and 92% vs. 84%, respectively); however the probability of success is much higher for the highest-income quartile under voluntary-enrollment 401(k) plans (84%) than for the DB plan (57%).

When the definition of “success” is a 70% pre-retirement income replacement, the lowest-income quartile still has a higher probability of success with the DB plan, and the second-income quartile has a slightly higher probability of success with the DB plan, but the third- and highest-income quartiles have a higher probability of success with the 401(k) plan.

Finally, defining “success” as replacing 80% of pre-retirement income in retirement, the analysis found the 401(k) plan has a much higher probability of success than the DB plan for all groups except the lowest-income quartile, for which the probability of success is virtually even for the 401(k) and the DB plan.

EBRI notes that a recent analysis from the Center for Retirement Research at Boston College found the shift to workers mostly being covered by defined contribution (DC) plans rather than DBs has not resulted in less retirement savings.

EBRI’s full report is published in the October 2015 EBRI Notes, “How Does the Probability of a “Successful” Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k) Plans?” available online at www.ebri.org.

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