Survey: Calculating a comfortable retirement
DES MOINES, Iowa - Rising costs and uncertainty about the economy have workers less confident in their ability to save enough money to retire comfortably, say the authors of a new study released last month.
Even though workers are saving more and expecting to work longer to improve their chances of a happy retirement, there's still a disconnect. The survey shows that many are failing to plan appropriately and making incorrect assumptions about retirement income.
The new survey by the nonpartisan Employee Benefit Research Institute finds that only 13 percent of U.S. workers say they're very confident they'll have enough money to retire comfortably.
"Concerns about the poor economy coupled with the losses that have recently been experienced in the stock market have resulted in the lowest percentage [of a confident outlook] since the start of the survey 19 years ago," said Jack VanDerhei, one of the survey's authors and the EBRI research director. "But the good news is, I really do think this will be a wake up call for many people who had false optimism in the past."
And 41 percent more workers said they're somewhat confident of having enough savings for retirement, down two percentage points from the year before. Only 20 percent of people already retired say they're very confident they'll be financially secure. That's just half of the 40 percent from the survey a year earlier.
It's no surprise that most survey respondents said the economy was largely behind their pessimism.
Change in behavior. With the dour mood about retirement prospects comes some behavioral changes that advisers and retirement planners say may be one of the positives coming out of the economic downturn.
The survey shows that 81 percent of those who have lost confidence in having enough money to retire say they are spending less. The survey also shows 65 percent of workers say they are currently saving money for retirement.
"One strategy would have been to roll up into a ball and somehow put your head in the sand and ignore this is happening," said Dan Houston, president of retirement and investor services at Principal Financial Group Inc., an underwriter of the survey. Workers have not done that, however. He said people are beginning to understand a secure retirement means saving much more than they have been.
The average worker with an employer-sponsored retirement plan puts aside 7 percent, which is about half of what today's worker would need to live a comparable lifestyle in retirement, Houston said.
Estimating how much money it will take to live a good retirement is one of the largest miscalculations among workers, VanDerhei said.
About half the workers in the survey say their household savings and investments total less than $25,000, excluding the value of their home. A surprising 20 percent say they have less than $1,000 in savings.
This signals a tremendous problem ahead. Consider that a woman earning $40,000 at retirement would need to have $203,134 in savings by age 65 to ensure she could replace 80 percent of her income in retirement, VanDerhei said. The calculation assumes she has purchased an annuity with a nominal guaranteed income and receives Social Security. A man under the same circumstances would need $190,138.
Sources of retirement income. Another point of confusion for many workers is the source of their retirement income.
Among workers without a defined benefit retirement plan at work, 41 percent believe they have such a pension plan. A defined benefit plan is one in which an employer pays into but the worker does not.
"I'm just afraid you still have a situation where these are people who don't understand the difference between defined benefit and defined contribution plans," VanDerhei said. "They think they'll magically end up with what mom and dad had."
The U.S. Bureau of Labor Statistics said in a March report that just 20 percent of private industry workers have a defined benefit plan. About 43 percent have a defined contribution plan such as a 401(k).
A disturbing factor for many investment advisers and retirement planners from the EBRI survey is that only 44 percent of workers say they have tried to calculate how much money they'll need to have saved for retirement. Another 44 percent said they simply guess at how much they'll need.
Fewer than a quarter say they've tried to approximate how much they'll need and fewer than a fifth say they've checked with a financial adviser. Nine percent say they read or heard about how much they should have, 7 percent have used an Internet calculator and 5 percent filled out a worksheet.
The survey is based on random telephone calls to 1,257 people age 25 and older in January. It included a cell phone supplement to encompass a broader selection of people. The survey's statistical margin of error is plus or minus 3 percentage points.
The was sponsored by EBRI and Washington-based market research company Mathew Greenwald & Associates Inc.