Plan for What You Can Control in Retirement

The Employee Benefit Research Institute, a nonprofit research organization, recently released details from its 25th annual Retirement Confidence Survey. The survey was conducted in January and February of 2015 and includes both workers and retirees, ages 25 and up. As is usually the case with each annual survey, the results of the survey are a mixed bag of positive developments and worrisome trends.

Optimism & Increased 401(k) Balances

One very positive development reflected in the survey is the percentage of workers who feel confident in having enough money saved for a comfortable retirement. 13 percent of respondents indicated they were ‘very confident’ of their comfortable retirement in 2013. That number increased to 18 percent in 2014. In 2015, that number increased again to 22 percent. Additionally, 36 percent of respondents in 2015 indicated they were ‘somewhat confident’ in their comfortable retirement, meaning that roughly three in five respondents were very or somewhat confident about their retirement prospects. At the other end of the spectrum, 24 percent of respondents (one in four) were ‘not at all confident’.

The optimism among workers appears to be well-founded, as workers’ 401(k) plan balances have also grown in recent years. While still not where most retirees will need them to be for a comfortable thirty year retirement yet, the average 401(k) account balance stood at $91,300 at the end of 2014, according to Fidelity Investments. That is a 30 percent jump in value from the 2011 average 401(k) balance of $69,100! A substantial portion of that increase is probably attributable to equity market returns in recent years, since 50 percent of survey respondents indicated that the pressure of daily costs means they cannot afford to save more money and therefore are not likely contributing more to their retirement savings.

Expectations Often Not Meeting Retiree's Reality

There were also some survey responses that indicate that there is still some work that needs to be done in securing a comfortable retirement for many respondents. 56 percent of survey respondents think they will be able to live on 70 percent of their pre-retirement income in retirement, while only 10 percent of survey respondents currently working estimated that they will need more than 95 percent of pre-retirement income during retirement. Many retirees may be surprised to find out that longer life expectancies and rapidly increasing healthcare costs may necessitate a much higher retirement income than thought necessary by previous generations of retirees or financial advisors.

As you might expect after the recent recession and bear market correction, many more workers are planning to work longer and retire later than before.  In 1991 during the first Retirement Confidence Survey, only 11 percent of workers expected to retire later than age 65. By 2015, that number had more than tripled to 36 percent of respondents expecting to retire later than age 65. And 10 percent of respondents in the latest survey plan to never stop working.

But frequently, workers are not able to work as long as they intend.  The 2015 survey revealed that 50 percent of retiree respondents retired earlier than they had planned. Data going back to the first survey in 1991 shows that the percentage of retirees who stopped working earlier than intended has fluctuated in the 40 to 50 percent range over the 25 year time period. And the median retirement age has remained at age 62, unchanged since 1991.

Other questions in the most recent survey revealed that 9 percent of respondents planned to retire before age 60, but survey data showed that 36% of retirees actually retired before age 60. 67 percent of survey respondents in the 2015 survey indicated they plan to retire at age 65 or later. The study shows that only 23% were actually able to retire at age 65 or later. There were several reasons frequently cited for leaving the workforce earlier than planned. Among the most popular reasons given for retiring early were: poor health or disability (60 percent), downsizing or closure at place of employment (27 percent), and quitting their job to care for a spouse or other family member (22 percent).

Planning For the Realities of Retirement

While some might view the data as a reason to get discouraged about their retirement prospects, I think there are some important lessons to be learned from the survey.  The first lesson is the importance of actively participating in a retirement plan. Among those who participated in a retirement plan, the percentage of survey respondents who answered ‘very confident’ doubled from 14 percent in 2013 to 28 percent in 2015. That is 6 percentage points higher than the entire surveyed population. There is no better way to begin preparing for retirement than enrolling in a retirement plan offered in the workplace. Saving early on, even if it is only a little bit, gives your investments the opportunity to appreciate rapidly through the power of compound interest.

The second, and perhaps most important lesson, is to focus on what you can control in retirement planning. When you look at the most popular reasons why people retired early (poor health, downsizing and loss of job, and caring for family members) these are all things out of our control. Instead of worrying about factors that we cannot control, it would be more beneficial to focus on the retirement planning factors that we can control. Want to take control of your retirement? Here are some things you can do to make sure you are able to achieve your ideal retirement:

  • Are you saving for retirement? Are you saving at least 10 percent of your income for retirement? If you are participating in a workplace retirement plan, are you contributing at least as much as is needed to get the employer match?
  • Do you know how much you need to save for retirement? Do you know how much retirement income you are set to receive from Social Security, pensions, and your retirement nest egg? If you haven’t properly identified your retirement goals, how will you measure your progress towards them?
  • Are all of your retirement assets allocated properly? Invest too conservatively too early, and you are less likely to reach your retirement goals. Invest too aggressively later in life, and you could put your comfortable retirement in jeopardy.
  • Have you met with a Certified Financial Planner™ at least ten years before you plan to retire? The sooner you start planning, the more likely you are to reach your financial goals.

Don’t know how to get started? Need a second opinion? Give us a call at 419-878-3934 to ensure you are on the right path to a comfortable retirement