According to Gallup, having enough money for retirement is the most common financial concern in the U.S. In the 2020 survey, Gallup found that 59% of Americans are worried about not having enough money for retirement. That’s remained steady for the last few years but is actually down from last decade, when over 66% of Americans were concerned about funding their retirements.
The trend is positive, but it’s still troubling that over half of people in one of the wealthiest economies on earth are worried about supporting themselves in their old age. In fact, I think that huge number reveals a fundamental oversight in our approach to retirement.
While social security contributes to basic financial security in retirement, over the past few decades, more and more of the burden of financing your retirement has been shifted onto the individual which has contributed to that majority of Americans worried about retirement.
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In 1979, 84% of private-sector workers who participated in a pension plan had a defined benefit (DB) plan, a type of pension. Under a defined benefit plan, the employer manages the investments and accepts the investment risk, and most offer the employee the option of a lifetime annuity: a monthly stream of payments through the end of their (and often their spouse’s) life.
However, today, only 31% of workers with retirement plans have the option of choosing a defined benefit plan. And the actual percentage of people going into retirement with defined benefit plans is closer to 10%, as you can see in the graph below from the Investment Company Institute.
Much more common are defined contribution (DC) plans, such as 401(k) plans, which put much more responsibility on the individual. The Bipartisan Policy center has highlighted this transition in a 2016 analysis which came on the heels of a September 2014 report which stated, “This transition was more accidental than intentional; DC accounts were originally supplements to DB pensions, but today those accounts are typically the sole employer retirement plan offering.”
Under a defined contribution plan, the employer’s financial liability mostly ends at the point of contribution. If you have a defined contribution retirement plan, you usually have to make your own investment choices (albeit among the plan sponsor’s limited investment options) and take on the associated investment risk yourself. You also have to manage withdrawals from the plan yourself, and usually aren’t given an annuity option.
Employees are often strongly encouraged to participate in these plans, which is good. But participants often have little or no preparation for how to deal with this responsibility.
In fact, one of the latest innovations in the world of retirement accounts is automatic enrollment, where employees are automatically opted in to the company retirement plan. Automatic enrollment has gotten more people invested in retirement plans, which is great. But it also means that many workers now find themselves in possession of a retirement plan they know nothing about, without having taken any action to get it.
The most common emotion this creates is not peace of mind, but worry. Employees often don’t know how much they have in that account, if it’s enough, or if they’re doing the right thing with it.
And yet, very few take steps to address this ignorance. “Most people do not plan for retirement. They have never tried to figure out how much they will need to save,” Annamaria Lusardi, academic director of the Global Financial Literacy Excellence Center, previously told CNBC. “Only 46% say they have ever tried to figure out” what they will need in retirement, she added.
In another study, by Ameriprise Financial, less than one-fourth of respondents said they had calculated how much they need to save for retirement.
If you don’t know how much you’ll need in retirement, of course you’re going to worry about whether you have enough!
On the other hand, if you’ve used a retirement calculator or talked to an advisor, you’re usually going to feel a lot less worried.
The difference a little knowledge can make is clear when comparing how current and future retirees feel about their retirement:
Two-thirds (68%) of current retirees feel they are on track for the remainder of their retirement. By contrast, only 28% of those not retired feel the same way.
Ameriprise thinks the difference is probably due to a lack of knowledge among pre-retirees. Their report chalked up part of “the confidence advantage enjoyed by current retirees” to the fact that “more of them work with financial advisors (36% of current retirees versus 25% of pre-retirees).”
Retirees are simply better informed about the financial challenges of retirement. A survey by Voya Financial found that workers scored an average of 4.1 out of 10 on their retirement knowledge, planning and saving, while retirees scored an average of 5.5.
This knowledge gap leads to a confidence gap, which leads to a lot of worry on the part of the unretired.
Investors the Least Worried about Retirement Live in… Detroit?
In a 2013 survey measuring Americans’ confidence in their retirement, Ameriprise Financial found in their New Retirement Mindscape survey that, surprisingly, residents of Detroit felt the second-best prepared for retirement, despite the city’s impending bankruptcy filing. The survey’s authors speculated:
“One of the most surprising moves on the index was the significant jump among residents in the financially troubled Detroit metro area, which claimed the No. 2 spot… Detroit’s dramatic jump, just before the city itself declared bankruptcy, may reflect a determination among area residents to take personal responsibility for their retirement.
“While we can’t say for certain what caused such high levels of preparation, we do know a few things about Detroit. Two in five (38%) Detroit respondents have a financial advisor (compared with a national average of only 29%), and well over half (58%) have contributed to a workplace-sponsored retirement plan such as a 401(k), which is also higher than the national average (51%). Half of Detroit-area respondents feel they are on track for retirement, and 71% report positive feelings about retirement.”
Detroit’s story confirms that it’s not how much you’ve saved for retirement that makes the difference—Detroit is far from America’s wealthiest city—but how informed you are about what lies ahead.
This should be great news! Anyone can become more informed about retirement investing, and it doesn’t have to be hard or cost a lot. Earning, saving, or finding more money is hard—but learning something shouldn’t be.
However, because we know how worried most Americans still are about retirement, it’s clear that people are facing some pretty big hurdles to gaining this knowledge. I can’t say for certain why people aren’t seeking out this information… maybe they don’t know where to look, are afraid of what they’ll learn, think they can’t afford advice, or simply find the subject uninteresting.
But becoming more informed about your financial future doesn’t have to be hard, expensive or time-consuming. Financial Freedom Federation offers a variety of informational resources to help any investor become both more financially literate and more confident in planning for the future.
So when I read that 59% of Americans are worried about having enough money to retire, I want to know how we can provide that information that will make a difference to them. With 90% of us now primarily responsible for our financial security in retirement, I think the need for good advice is greater than ever.
One simple thing …
Just as we believe anyone can be a good investor, I think anyone can be a prepared retiree: you just have to know where to start.