Trendspotting

In the Dark on Deferral Limits
Most people are unaware of how much they can invest

According to a recent survey from Fifth Third Bank, fully 90% of Americans do not know the maximum amount of money they can defer to their 401(k) or other defined contribution (DC) plan accounts annually without triggering tax repercussions.

As the Internal Revenue Service (IRS) explains, the elective deferral/contribution limit for employees who participate in 401(k), 403(b) and most 457 plans or the federal government’s Thrift Savings Plan increased from $17,500 in 2014 to $18,000 for the 2015 plan year. The catch-up contribution limit for employees ages 50 and over also increased by $500—from $5,500 to $6,000. Effective January 1, the limitation on the annual benefit under a defined benefit (DB) plan under Internal Revenue Code (IRC) Section 415(b)(1)(A) has remained unchanged at $210,000.

According to Fifth Third Bank researchers, despite the fact that the IRS tends to increase these limits by a small margin annually, very few retirement savers in the U.S. are either aware of the limit or actually set their deferrals to match it. This is unfortunate, as following the annual increases can give a major boost to retirement readiness and projected lifetime income levels. Even for people saving below the high-water mark the agency permits, enacting a $500 increase in yearly savings can result in an extra $110,000 return over a 40-year time horizon.

“It’s clear there is a gap between believing oneself to be financially savvy and having all the knowledge needed to successfully manage one’s financial life,” says Camino Smith, senior vice president of community and economic development for Fifth Third Bank in Cincinnati. “This is especially true as it pertains to saving for the future.”

While the survey found that nearly 60% of respondents feel they are financially savvy, 44% of Americans live paycheck to paycheck. Other key findings show that less than half of Millennials know what a credit score measures, while 60% of Americans of all ages have too little money saved to pay bills for six months in case of an emergency or unexpected loss of income.

Fifth Third Bank concludes that retirement savers tend to do much better in the long run when they have access to training and education from a financial adviser or some other trusted professional resource. The bank encourages plan sponsors and advisers to find ways to efficiently educate more Americans on these key topics. Even if they have insufficient assets to make one-on-one financial advice tenable, Americans want support when it comes to budgeting, controlling credit and creating emergency funds. —John Manganaro

ACA Offers Opportunity
Sponsors want help understanding the Affordable Care Act

When Nationwide Retirement Institute set out to survey small businesses with 50 to 299 employees about their reactions to the Patient Protection and Affordable Care Act (ACA), it found a few surprises. First, companies said their medical benefits began to seem less competitive as employees began to see what the government plans offered as more attractive. To compensate, many of these businesses are increasing their contribution to employee retirement plans—and most say they need help from advisers with that and other benefits programs.

A few factors are in play, says John Carter, president of the retirement plans business at Nationwide in Columbus, Ohio. “First, the employees have more choices,” he says. “They have the employee benefit plan, or they can turn to the exchange.” As a result, the overall benefits package is a critical area for employers to examine. “If the employee chooses to go to the exchange, the company then has the salary and the retirement plan to focus on to recruit and retain staff.”

Nearly two-thirds (64%) of workers for small businesses already see their health benefits as less attractive than what they can find on the open market. Carter observes that shopping for individual policies had less appeal before the ACA, which made it illegal for insurance companies to reject applicants suffering from pre-existing conditions. Small businesses are increasingly turning to financial advisers for assistance, Carter says, noting this is unsurprising when you look at small businesses and the role of medical benefits in retaining employees. “Forty-four percent of small-business owners said the ACA is difficult to navigate,” he says, and 34% said they are unprepared to handle the changes.

Carter also points out that nearly half (43%) of the smaller companies with at least 50 employees increased their contributions to the retirement plan a mere four months into the ACA’s implementation. “It’s a clear sign they are ready to re-engage with the plan’s features, having discussions with employees so they really see the benefit of the plan,” he says. “It’s a huge opportunity for advisers.”

Those firms, Carter notes, will be under the same ACA requirements to provide health insurance for their full-time employees starting January 1, 2016. These smaller employers have a big appetite for help, according to Nationwide’s survey: 77% of small businesses said having an adviser familiar with the ACA would benefit their company. Seventy-two percent said they would want to talk to an adviser who is familiar with the ACA.

Advisers interested in this part of their book of business may turn to resources such as those offered by Nationwide to prepare for helpful conversations with small businesses. Among the offerings on Nationwide’s site are white papers, tools, capabilities and content from The American College. —Jill Cornfield

Source: American Institute of CPAs, Personal Financial Planning Trends Survey

Advisers Boost Confidence
Those working with an adviser feel better prepared

Nearly all Baby Boomers who work with financial advisers (90%) have money saved for retirement, and 80% feel readier for that life stage because of that adviser relationship.

“I think it’s important to consider that Boomers who work with advisers are better prepared,” says Cathy Weatherford, president and CEO of the Insured Retirement Institute (IRI), in Washington, D.C., which issued the report “Boomer Expectations for Retirement 2015.”

“Professional financial help can add tremendous value around preparedness, confidence and anticipation of cognitive problems,” she says.

Only six in 10 Baby Boomers report having money saved for retirement, down sharply from prior years when approximately eight in 10 had retirement savings. Only 28% are extremely or very confident they will have enough money to pay their medical expenses in retirement, down from 37% in 2011.

More than one-third (36%) of working Boomers plan to retire at age 70 or later, a significantly higher percentage than the one in five (19%) who planned to do so in 2011. About two in 10 (18%) are uncertain as to when they might retire, with three-quarters of that cohort citing inadequate savings for their doubts. This is down from almost four in 10 (39%) who were unsure of their retirement age in 2011.

According to the survey, annuity ownership is highly correlated with positive retirement expectations. More than nine in 10 Boomers who own annuities have money saved for retirement; less than half of those who do not own annuities have retirement savings.

Eight in 10 Boomers who own annuities expect their money to last throughout retirement and at least some disposable income to be available for travel and leisure, compared with less than half of those who do not own annuities. More than six in 10 annuity-owner Baby Boomers have calculated the amount they think they will need to have saved to retire, and a similar number have consulted a financial adviser to help them prepare for retirement; fewer than two in 10 non-annuity-owners have taken this step. —Rebecca Moore

Adult Kids Elbowing Parents
Only those folks who cut the apron strings are at an advantage

The extent to which grown kids lean on their parents for financial support plays a big part in people’s ability to retire, says Hearts & Wallets in a new study. In fact, parents of financially independent children are more than twice as likely to be retired as parents whose offspring still look to them financially.

“Dissecting the Baby Boomers: How a Parental and Financial Support Status Segmentation Reveals Key Differences in Finances, Attitudes and Behaviors” underscores the importance of segmentation, which uncovers the diverse goals and needs of this market for financial services products and advice.

Supporting children is a major factor in Baby Boomers’ ability to retire. Overall, 35% of Boomers are retired from full-time work. Only 21% of those who support adult children are fully retired. More than half (52%) of Boomer households that include unsupported children (or others, such as extended family) are retired.

Just 17% of Boomers who support minor children or adult children are fully retired. That is roughly half the 32% of Boomers who have financially independent adult children and who support no one else. Parental support trends have been consistent over the past five years and continue to have a major impact for many Baby Boomers. Generation X may experience similar effects when their children reach age 18.

Boomers who support adult children juggle more than just a full house. They are 25% more likely to have heightened financial anxiety than their peers. This segment, more than any other in the study, is also the most concerned about saving enough for retirement.

Boomers who support someone financially have very different concerns than those who do not, says Chris Brown, Hearts & Wallets partner and co-founder. Goals also differ for parents who support adult kids versus those with minor children. Parents supporting adult children wonder when—or if—their kids will ever become independent. They worry about saving enough to have freedom to enjoy life as they age. Boomer parents of minors are more upbeat about managing money. —Jill Cornfield

Savings Needs by Age, Gender
EBRI says the earlier a person starts, the less he needs to sock away

A new analysis from the Employee Benefit Research Institute (EBRI) shows that timing really counts when it comes to successful retirement savings efforts: The earlier a person starts saving, the less he must take from his annual income.

The research findings are not exactly groundbreaking, EBRI admits, but they highlight an important truth in retirement planning: The longer a person waits to start saving, the more he will have to divert each month to catch up. This effect is magnified by the benefits of compounding, which often make it nearly impossible for real-world savers to recover from long-term savings delays.

As noted by EBRI, the modeling currently excludes any net home equity or traditional pension income, and it fails to factor in pre-retirement leakage.

The EBRI analysis presents the required contribution rates for those starting to save at ages 25, 40 or 55. It also presents the minimum account balances required for those contributing to their plans at 4.5%, 9% or 15% of salary and shows how much they should have saved at a particular age threshold to be “on track” for a successful retirement.

For instance, the EBRI analysis finds that, for a 25-year-old single male with no previous savings who earns $40,000 a year, a total contribution rate of 3% of his salary until age 65 would result in a 50–50 chance of retirement income adequacy. Saving 6.4% of salary would boost his chances of success to 75%, EBRI says, while women that age would need slightly more along the way because of their longer lifespans.

A 40-year-old male with no previous savings, earning $40,000, would need a total contribution rate of 6.5% of salary just to have a 50–50 shot at a financially successful retirement, the institute says, because he has less time to work and save. Saving 16.5% of salary would produce the 75% chance of success—again highlighting the strong benefits of saving early.

Finally, a 55-year-old male making $40,000 with no previous savings would need a total contribution rate of as much as a quarter of his salary to reach the 50–50 chance of a successful retirement, again due to little time left in the work force. —John Manganaro

Advisers Behind on Client Tech
They need to improve digital capabilities

Financial advisers are not adequately prepared to deliver the advanced digital capabilities needed to meet the expectations of younger generations of investors, according to Aite Group research.

In “The Race to Easy: Re-evaluating the Wealth Management Technology Strategy,” researchers suggest that the passage of more and more wealth to Generation X and Millennial investors requires firms to launch new service models that blend high-tech and classic adviser services.

“Evaluating how digital technologies complement and enable existing adviser services should be a priority for firms to ensure they remain competitive over the long term while they continue to meet the needs of existing clients, who now expect self-service tools and digital access to their wealth information,” notes Sophie Schmitt, senior analyst, wealth management, at Aite Group in Boston.

According to the report, the majority of today’s financial advisers are still under-prepared to deliver the digital experiences that investors need and expect. Further complicating matters, the adoption of mobile and tablet devices to access and manage personal finances is increasing steadily across all generations, not just Millennials. As a result, advisers need to prioritize information technology (IT) advancements that contribute to the success of all client segments.

The report maintains that advisory firm owners have another reason to implement technology improvements, beyond ensuring client satisfaction. One in particular, cited by 72% of advisory executives, was that these changes will also be critical for attracting and retaining younger advisers to the firm. This is especially important for firms that currently lean heavily on advisers with long tenures.

These points are further supported by data showing that just 55% of advisers have their own websites. Within a few years, this number is expected to reach 80% as advisers recognize the importance of a digital platform for attracting younger talent and clients. While later generations are more likely to tap into digital tools to build their financial knowledge base and access their investment portfolios, Baby Boomers look to traditional investment firms and financial advisers as their primary source of support. According to the report, nearly 60% of Boomers receive help from a traditional investment firm or financial adviser, compared with only 27% of Millennial investors. —John Manganaro

Solid Retirement Equals Success
In the past, financial success was defined as home ownership

With a greater emphasis on retirement savings taking hold in the nation, Americans’ views on prosperity are being reshaped, according to a telephone survey of 1,010 adults conducted by Harris Poll for the American Institute of Certified Public Accountants (AICPA).

Nearly one-third (28%) of those polled said that being able to retire comfortably is the earmark of financial success, compared with 11% who said owning a home and another 11% who said being better financially situated than their parents.

“Today’s American dream is greatly shifted from the one defined by previous generations,” says Ernie Almonte, chair of the AICPA’s National CPA Financial Literacy Commission in Boston. “Whether the reason is the lingering result of the housing bust or difficulty getting ahead in a still recovering economy, it’s clear that Americans have changed the benchmarks for their financial success.”

Americans are optimistic about their financial prospects and are taking positive action. One in five (21%) report that they have already achieved financial success, and another 52% believe they will be able to do so in their lifetime. Since the recession of 2008, 85% have made positive changes to their financial behavior, with 58% following a monthly budget, 35% putting away money in an emergency fund, and 32% starting or increasing contributions to their retirement account.

AICPA suggests Americans take four steps to improve their financial health: 1) Set and follow a budget; 2) set concrete financial goals; 3) reduce debt; and 4) be aware of temptations. —Lee Barney

New Retirement Mentality
Work may not end when retirement begins

Welcome to the new retirement. Work may not end when retirement begins, and money is not the only reason.

At the same time that attitudes toward retirement are shifting, Social Security, inflation and market volatility continue to challenge many Americans as they squint at an uncertain future, according to a Franklin Templeton Investments study. More than half (55%) of Americans are considering continued employment during their retirement, according to the firm’s 2015 Retirement Income Strategies and Expectations (RISE) Survey. Nearly one-third (30%) of survey respondents ages 18 through 24 say they never plan to retire.

The majority (61%) of survey respondents say that if inadequate income in retirement will make it impossible to retire as they had planned, they will adjust their plans—or already have—to delay that step. The youngest respondents to the survey—those ages 18 through 24—are likeliest to say they would keep working (74%).

Delaying retirement may not be just a matter of money. About 20% of non-retired respondents say they would most likely delay retirement because they enjoy working. However, only 28% of all adults expect their job to be a primary source of retirement income.

Among those who plan to retire, when asked what they look forward to, slightly more than one-third (36%) say “not working.” Many eagerly anticipate pursuing hobbies (46%) or learning a new skill or subject (22%).

The concept of retirement still raises some anxiety: 67% of Americans experience some stress, in general. Stress levels peak within 15 years of retirement, with 76% reporting stress, according to Franklin Templeton’s data.

Topping the list of retirement concerns are running out of money and health/medical issues, which tied with 27% each. Survey respondents ages 25 through 34 are most worried about running out of money (36%), while older respondents, 65 through 74, are most concerned about health and medical issues (52%).

Although delaying the age at which an individual begins receiving Social Security may result in higher benefits and increased retirement income, the majority (59%) of retirees say they took the benefit before full retirement age. Only 16% started the benefit at full retirement age, and a mere 7% of retired Americans delayed until later. —Jill Cornfield