When it comes to their eventual retirement, it’s time for working Americans to take a reality check. That’s my major takeaway from the just-released 2015 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI).
EBRI’s annual Retirement Confidence Survey is the biggest and, arguably, the best gauge of how Americans are planning for retirement — or not. It also asks retirees about their own their retirements, which makes for a fascinating juxtaposition. (For an example of how little workers know about their 401(k) plans, watch the new video above from Dream Forward Financial, a 401(k) advisory and management startup.)
4 Head-Scratching Survey Findings
So why the need for a reality check? Consider four findings from EBRI’s 25th annual Retirement Confidence Survey:
Many workers and retirees are far more confident about their retirement prospects than two years ago. Now, 28 percent of workers who have an employer-sponsored plan, IRA or a pension (or whose spouses do) are “very confident” about having enough money for a comfortable retirement, up from 14 percent in 2013. Similarly, 37 percent of retirees are very confident vs. 18 percent in 2013. Trouble is, their confidence may be misplaced overenthusiasm due to the runup in the stock market.
Jack VanDerhei, EBRI research director and co-author of the report, calls it “excessive extrapolation.” Says VanDerhei: “There have been a number of studies of 401(k) participation indicating that people have a tendency to do excessive extrapolation: they look at the last year or two or three and see good returns and extrapolate to the future that they’ll see the same thing going forward.”
Contrary to popular wisdom, VanDerhei says, retirees these days don’t park all their money in low-yielding bonds or bank accounts or CDs. He’s surprised how many are investing heavily in stocks. Yes, the market has ups, but it also has downs. As a rule, when you’re nearing, or in, retirement, it’s wise to reduce the percentage of your portfolio in stocks, so you have a significant amount in bonds, CDs and emergency savings as a buffer against a market downturn.
A much bigger percentage of workers say they’ll have part-time jobs in retirement than the actual percentage of retirees who do. In the study, 67 percent of workers said they plan to work for pay in retirement, compared with just 23 percent of retirees who reported they actually have done so. This gap has been enormous since 1998.
VanDerhei notes EBRI has consistently found that 50 percent of retirees left the workforce earlier than they planned, many due to a health problem or disability.
“There is a huge planning problem here,” he says. “When I talk to financial planners, I’m always telling them they have to get in the face of their clients and say: ‘You’ve got a choice: you can save as much as you can now or you can defer the pain and save less and take the chance you’ll still be able to keep working at what would’ve been your retirement age.’ But that’s very risky.”
Far more workers say they’ll get pensions in retirement than probably will. A sizable 55 percent of workers said they expect to receive pension benefits in retirement, but only 32 percent said they and/or their spouse have pension benefits with their current or previous employers. “I’m unable to come up with a cogent explanation” for this disparity, says VanDerhei. “Talk about people being overly-optimistic.”
And the findings that truly stunned me: Many workers — and retirees — are quite confident they’ll have enough money to take care of medical and long-term care expenses in retirement. EBRI found that 56 percent of workers (and 78 percent of retirees) were confident about having money for medical expenses in retirement and 44 percent of workers (59 percent of retirees) felt that way about long-term care costs. The latest Genworth Cost of Long-Term Care report said the median annual price of a private room in a nursing home is now $91,250; assisted living runs $43,200 a year.
I asked VanDerhei whether he thought workers’ and retirees’ expectations of their ability to pay medical and long-term care expenses were realistic. “Absolutely not. A huge percentage of people expect Medicare will pick up far more than it was ever designed to pick up,” says VanDerhei. Also, he adds, “it’s getting more and more difficult to have long-term care insurance policies that are affordable, if you can get them in the first place.”
And if you think Medicare will start covering more health- and long-term care costs, don’t bet on it. “Unless the public has a new appetite for paying more in payroll taxes, I don’t think there will be a government solution to this,” says VanDerhei, one of the nation’s leading retirement analysts.
A Paucity of Retirement Preparation
Both VanDerhei and I came away from the survey results disappointed about how little many workers are doing planning for retirement, especially those without employer-sponsored plans.
About two thirds of workers (64 percent) say they feel they’re behind schedule planning and saving for retirement. Some others may be fooling themselves.
Only 48 percent of workers have tried to figure out how much money they’ll need to have saved by the time they retire to live comfortably in retirement — a figure that has been pretty consistent for a decade, according to EBRI. To do this kind of estimate, I recommend two excellent calculators for people in their 50s and 60s: Retirement Works2 for You ($189 for the first year) and E$Planner (there’s a free basic version as well as one costing $40). Many mutual fund companies also have good, free retirement calculators on their websites and you don’t need to be an investor there to use them.
A third of workers also told EBRI that neither they nor their spouses have saved for retirement and 64 percent of workers without retirement plans said they’ve saved less than $1,000. The Dream Forward video suggests workers with 401(k)s know precious little about them and ignore their plans’ websites.
Craig Brimhall, Vice President of Wealth Strategies for Ameriprise Financial, thinks more workers could improve their prospects if they made a habit of saving through 401(k) and similar plans: “The majority of [EBRI] survey participants recognized they could improve their savings habits and I’m a firm believer that if you don’t see it, you can’t spend it. By having the money taken directly from your paycheck, you acclimate yourself to surviving on 85 to 90 percent of your pre-retirement income in retirement and it truly pays off down the road.”