Job Insecurity Drains Retirement Confidence

Every year, the Employee Benefits Research Institute (EBRI) delivers an insightful glimpse into how Americans are preparing for retirement – and how they feel about their future prospects. This year, American’s confidence in their ability to retire comfortably sits at a historically low level. Just 14 percent are very confident they will have enough money to live comfortably in retirement.

Significantly, employment security is a great worry. Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.

Why is the outlook so bleak? Many workers report they have virtually no savings and investments. Sixty percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Moreover, 25 percent of workers say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that more than tripled to 37 percent.

Is there hope for this situation to turn around? The answer to that question can be found in what I see as the most disturbing part of this year’s study. More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement. Study after study proves that investors who have a financial plan are better able to ride out tough times in the market and succeed in meeting their goals, and yet individuals and families continue to procrastinate and ignore the need to plan and save for their future. If you find yourself in this 56%, an excellent first step would be to meet with an advisor who operates under the fiduciary standard to review your situation and develop a plan.

Kudos to Generation Y

What interest rate are you earning on your savings account? The fact that today’s bank savings accounts generate virtually no yield certainly makes it tougher to convince younger generations to save for retirement. Yet, while you might expect that low interest rates and, therefore, lower compound growth over time, would result in even more young Americans spending rather than saving, a recent TD Ameritrade survey found the reverse to be true. The survey found that Generation Y (teens and twenty-somethings) are more dedicated to saving than their parents and grandparents.

Specifically, the survey reported that 25% of Generation Y and 23% of Generation X who are in their 30s and 40s are saving in their 401(k) plans. This compares to just 16% of Baby Boomers. Generation Y can do better, however, by investing in appropriately diversified portfolios of stock and bonds. Somewhat surprisingly, the survey found that 40% of Generation Y will “never” invest in stocks.

The survey also illuminated another area for improvement. Although the vast majority of Boomers expressed worries about reaching their retirement goals, more than two thirds of those over age 50 (68%) did not take advantage of the catch up contribution provision to their employer-sponsored retirement plan that would have allowed them to sock away another $5,500 last year.

Working with a trusted financial advisor can ensure that you create a fully diversified portfolio that can minimize market volatility and take advantage of all opportunities to save for your short- and long-term goals.

58 Percent of Investors Have Lost Faith in the Stock Market

Surveys are beginning to record what we all know is true. The financial crisis has had a profound impact on investors. In fact, 58 percent of investors have lost faith in the stock market, according to a survey of 1,274 Americans conducted by Prudential Financial. Forty percent say they have a conservative portfolio, up from 33 percent before the recession, and 44 percent say they are unlikely to ever again invest in stocks. Only 37 percent describe their portfolios as aggressive, down from 46 percent prior to the recession.

While 70 percent of the respondents said they have taken steps to improve their financial situation by saving more or reallocating their investments, the majority have moved their money to more conservative investments. This move to safety creates a new risk that they might fall short on achieving their retirement goals.

For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.

Yet, investors may not be as reluctant to invest in equities as they report. According to Strategic Insight, year-to-date cash contributions through April to equity and hybrid funds have surpassed inflows to fixed income funds for the first time since the financial crisis. Equity funds netted $110 billion through April, mixed funds $30 billion and bond funds $100 billion as investors acknowledge higher equity allocations to meet their long-term financial objectives.”

401(k) Plans Hit the Big 3-0

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

What’s the Future of Social Security?

Do American workers have confidence that they will receive future benefits from Social Security? Results from the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey (RCS) show most American workers are skeptical about the program. Here are some statistics from the report:

• Seventy percent of workers are not too or not at all confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today.
• Three-quarters of workers express concern that the age at which they become eligible for Social Security retirement benefits will increase before they retire.
• Today’s workers are less likely to expect Social Security income in retirement (77 percent total major and minor source of income, down from 88 percent in 1991) than today’s retirees are to report having Social Security income (91 percent total).
• Workers are half as likely to expect Social Security to provide a major share of their income in retirement (33 percent) as retirees are to say Social Security makes up a major share of their income (68 percent). However, EBRI research found in 2009 that 60 percent of those age 65 or older received at least 75 percent of their income from Social Security.
• Workers who are closer to retirement are more likely to expect Social Security to be a source of income in retirement than are younger workers (92 percent of workers age 55 and older vs. 63 percent ages 25–34).

The message here is clear: The unsure long-term status of Social Security coupled with the significant decline of defined benefit plans mean that working Americans must shoulder an increased responsibility to fund a financially secure retirement.

EBRI’s 2011 Retirement Confidence Survey: Gender Comparisons Among Workers

Do men and women plan and save for retirement equally? The 21st annual Retirement Confidence Survey (RCS) provides some answers. The RCS found men and women are equally likely to save for retirement. Also, women are statistically as likely as men to report they are offered (43 percent vs. 49 percent) and contribute to (34 percent vs. 39 percent) a work place retirement savings plan. However, men (17%) are more likely than women (10%) to say they are very confident about several of the financial aspects of retirement.

Interestingly, although women tend to face higher health care expenses in retirement due to their greater longevity, women (35 percent) are more likely than men (26 percent) to think they will need to accumulate less than $250,000 for retirement. Another point of departure is that women are more likely than men to be very concerned about the possibility that Social Security payments will be reduced (68 percent vs. 52 percent) and the age at which they become eligible for Social Security retirement benefits will increase before they retire (54 percent vs.44 percent).

Apart from gender comparisons, the 2011 RCS reported some disconcerting news -- Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low. The percentage of workers not at all confident about having enough money for a comfortable retirement increased from 22 percent in 2010 to 27 percent this year, the highest level in the RCS’ 21 years. Also, instead of reducing spending and/or saving more to shore up retirement accounts, most workers are planning on delaying retirement and/or working part-time in retirement. My caution is always is that health concerns may not allow you to work as long as your figure to.

Still Dreaming of Early Retirement?

In spite of all your best laid plans, there may be a glitch in your retirement dreams. If you retire early, before you would qualify for Medicare, you may be looking at a costly gap in your health insurance. If you figure you will simply keep the coverage you have from your employer, think again. The nonpartisan Employee Benefit Research Institute (EBRI) recently examined data for private-sector establishments to answer the question: How many employers offer retiree health benefits to early retirees? Here’s what EBRI found:

• Overall, 444,150 private-sector establishments offer health benefits to early retirees, or about 11.2 percent of the total.
• Large employers are much more likely to offer retiree health benefits than small employers; 34.5 percent of employers with 1,000 or more workers offered them, compared with 1.2 percent of employers with fewer than 10 workers.
• Of the 984,697 employers with 1,000 or more workers, the 34.5 percent account for 339,720 employers that offered early retiree health benefits.

While these statistics don’t boost your confidence in your plans to rely on your employer, keep in mind that there is plenty more uncertainty in the mix. As companies cut costs to survive in an increasingly challenging economy, keep in mind that health benefits to retirees could be on the chopping block. Also, it is anyone’s guess what will happen to healthcare reform when the new Congress takes over.