Retirement Pulse – H1 2014
June 24, 2014
FULL-TIME US EMPLOYEES SAVE TOO LITTLE, MORE SET TO RETIRE IN 70s, SURVEY SHOWS
Full-time employees in the United States are saving too little to maintain their quality of life in retirement, pushing more to plan to retire in their 70s, a recent FutureAdvisor study shows.
FutureAdvisor’s Retirement Pulse, a detailed survey of full-time employees in America taken in the first half of 2014, shows the labor force’s savings rate is still too low for many to receive a decent income in retirement.
Of the five income brackets surveyed, middle-class income earners with $50,000 to $100,000 in annual salary save just 4.5% of their wages — less than half what they will probably need. While recommended savings ranges from 10% to 15% of income, Americans’ savings rates have been declining since the 1970s.
As a result, more and more Americans are planning on retiring later than ever before, with one in four saying they plan to retire in their 70s. While this is consistent with increased life expectancy, and may be seen as progress from a policy angle, the impact of delayed retirement on quality of living has yet to be determined.
Two-thirds of the employees surveyed understood they need to save at least 10% of their income to retire decently, but the survey revealed a behavior gap, with the average employee saving just 5.7% of income.
In addition, many savers were misallocating their investments, with one in five saying they believed cash was a good asset to invest in, even though its long-term returns have historically been poor.
This can be at least partially attributed to the lack of proper financial advice most Americans face. Only 29% of respondents had used a paid financial advisor, with most relying on their own reading and research, including friends and family.
Overall, the picture was one of Americans not saving sufficiently for retirement, and investing what they saved poorly, despite awareness of the need for retirement savings.
FutureAdvisor’s survery found an average savings rate of 5.7%, slightly higher than the personal current savings rate across the US of 3.8%, and saw a U-shaped savings patterns.
Those with lower household incomes saved more as a proportion of their income, while the lowest percentage savings rate was found in the middle, in the $50,000-$99,999 bracket.
Savings Rate By Income, Full-Time Employed Americans, 2014
The US Department of Commerce’s savings rate data which shows a similar picture of a low savings rate in the US, and a March 2014 rate of 3.8%.
That government data covers all Americans, while the FutureAdvisor survey includes only the full-time employed, which accounts for the slightly higher average savings rate.
US savings rates are generally too low for individuals to maintain their standard of living in retirement. This comes even as some believe Social Security will be unable to meet its full long-term obligations.
A comfortable savings rate is 10-15% of income, though individuals who start saving for retirement later typically have to save a larger proportion.
Personal Savings Rate, US, 2009-2014
Source: US Department of Commerce
Planned Retirement Age
Retirement age appears to be creeping up, and the idea of not retiring appears to be is now favored by almost 1 in 10 respondents. That said, the majority of respondents (58%) still intend to retire in their 60s.
Planned Retirement Age, US Full Time Employed Individuals, 2014
Proportion Of Income To Save For Retirement
Despite respondents saving 5.7% of their income on average, the majority were aware that they should be saving more. A little over 1 in 10 didn’t know how much they should be saving.
Most Americans had some theoretical grounding on the savings rates that they needed to hit — about 10%-15% — to be attain a constant standard of living in retirement.
Retirement Confidence by Age
As age cohorts got closer to retirement, their confidence started to bifurcate. Under 30, 1 in 5 individuals are neutral on their retirement prospects, but by the time they hit their sixties or older, they become either “somewhat confident” in their retirement or “extremely nervous.”
In America today, many young people don’t think about retirement, and are unable to project their retirement situation with any confidence. Our data suggests they may not fully realize until later in life that they are not on course to be able to sustain their standard of living after their projected retirement age. This is often too late to begin saving while benefiting long-term compounding.
Question asked: How do you feel about your ability to provide for yourself in retirement?
Retirement Asset Allocation
Stocks are the preferred choice of almost half of retirement savers, followed by real estate. But 18% of respondents thought that cash investments would help them save for retirement, even though cash’s value is eroded over time, and historically it has been a poor way to save for retirement.
Preferred Retirement Investment Asset Class
Question: Which type of investment do you believe will best let you save for retirement?
Retirement Planning Aids
Respondents continue to rely on their own research and the advice of friends and family more than paid financial advice. Historically, professional financial advice has only been available to investors with assets over $500,000. This is changing with the spread of robo-advisory services.
Retirement Planning Resources, 2014
Question: Have any of the following helped you plan for retirement?
Based on proprietary market research, this survey seeks to examine macro trends in the US economy related to retirement saving through a detailed retirement survey completed by 154 Americans between April 28 and May 6, 2014. Certain responses was cross-tabulated against existing panel demographic information to achieve a cross-section perspective against age and geography. In addition to the demographic questions stored against panellists, the survey asked nine unique survey questions. Those were typically in a randomized multiple choice format, but with some open-ended response questions.
FutureAdvisor is an award-winning registered investment advisory firm serving clients nationwide from our offices in downtown San Francisco. Our team of Chartered Financial Analysts and Math PhDs use software to actively monitor and manage our clients’ existing 401(k), IRA, and taxable accounts from a household-wide, long-term perspective. FutureAdvisor can make recommendations for your portfolio in just a few minutes. Get your free analysis at www.futureadvisor.com.
Chris Nicholson – (four one five) 696-4031 – chris.nicholson <at> futureadvisor.com
The views expressed are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities.