Issue Brief - Employee Benefit Research Institute

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E B RI E MP LO YE E B E N EF I T R E S E ARCH I N S TI TU TE ®

Issue Brief No. 280 April 2005

Encouraging Workers to Save: The 2005 Retirement Confidence Survey by Ruth Helman, Mathew Greenwald & Associates; Dallas Salisbury, Variny Paladino and Craig Copeland, EBRI •













This Issue Brief reports findings of the 15th annual Retirement Confidence Survey® (RCS), which points to potential solutions to the American retirement savings problem, specifically ways that could help workers save more through their employment-based retirement plans. Importance of Employer Match: More than 7 in 10 workers not currently contributing to their employer-sponsored retirement plan say an employer contribution of up to 5 percent of their salary would make them much more or somewhat more likely to participate (72 percent). Simplified Options: Other retirement plan options that nonparticipants say would make them more likely to contribute are an investment option that automatically becomes more conservative as their retirement date approaches (66 percent) and a feature that automatically raises workers’ contributions by a fixed amount or percentage when they receive a pay raise (55 percent). Automatic Enrollment: Two-thirds of nonparticipants indicate they would be very or somewhat likely to remain in their employer’s plan if they were automatically enrolled (66 percent). Social Security: Nearly 7 in 10 of today’s workers are skeptical that Social Security will continue to provide benefits of at least equal value to those received by current retirees (68 percent). This proportion has remained relatively constant in recent years, but is below the 1995 level (79 percent). Workers continue to be unable to identify the age at which they will be eligible for full Social Security benefits. Most Behind Schedule in Saving: A majority of workers believe they are behind schedule when it comes to planning and saving for retirement (55 percent). Most of those behind schedule say that high expenses, particularly everyday expenses (49 percent), child-rearing expenses (39 percent), and medical costs (35 percent), are a major factor in keeping them from saving. Less Than Half Have Tried to Calculate Needed Savings: Approximately 4 in 10 workers say they have tried to calculate how much they need to accumulate for retirement. More than one-third of these workers say they asked a financial advisor to calculate this number or used their own estimates; 10 percent say they simply guessed how much they will need in retirement.

EBRI Issue Brief No. 280 • April 2005 • © 2005 EBRI • www.ebri.org

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Table of Contents Overview ........................................................................................................................................4 What Works? ..................................................................................................................................6 Retirement Savings Needs Calculation..................................................................................................... 6 Automatic Enrollment in Employer-Sponsored Plans .............................................................................. 7 Other Enhancements to Employer-Sponsored Plans................................................................................. 8 Saving Outside of Work.......................................................................................................................... 10 Information Sources for Retirement Planning ........................................................................................ 11

Worker Retirement Saving Progress ............................................................................................13 Saving for Retirement ............................................................................................................................. 13 Total Savings .......................................................................................................................................... 15 Self-Estimation of Progress .................................................................................................................... 15 Why Behind? .......................................................................................................................................... 16 Expenses ................................................................................................................................................. 17 Debts ....................................................................................................................................................... 19

Retirement Confidence or Overconfidence?.................................................................................19 Overall Retirement Confidence .............................................................................................................. 19 Confidence in Other Financial Aspects of Retirement............................................................................ 21 Overconfidence....................................................................................................................................... 22 Confidence in Entitlement Programs ...................................................................................................... 23

Expectations About Retirement....................................................................................................24 Retirement Age ....................................................................................................................................... 24 Working in Retirement ........................................................................................................................... 25 Retirement Lifestyle ............................................................................................................................... 25 Length of Retirement .............................................................................................................................. 27 Retirement Income.................................................................................................................................. 27

RCS Methodology ........................................................................................................................28 Endnotes .......................................................................................................................................29

Figures Figure 1, Workers Having Tried to Calculate How Much Money They Will Need to Save ................ 6 Figure 2, Amount of Savings Needed for Retirement, by Doing a Retirement Needs Calculation ...... 7 Figure 3, Method of Determining Savings Needed for Retirement, by Doing a Retirement Needs Calculation ............................................................................................................................... 7 Figure 4, Likelihood of Staying in a Workplace Savings Plan if Automatically Enrolled, Among Workers Offered Employer-Sponsored Plan But Not Participating ........................................ 8 Figure 5, Likelihood of Using Savings Plan Feature if Offered, Among Workers Participating in an Employer-Sponsored Retirement Savings Plan ....................................................................... 9 Figure 6, Change in Likelihood of Participating in Savings Plan if Feature Were Offered, Among Workers Offered Employer-Sponsored Plan But Not Participating ...................................... 10 Figure 7, Likelihood of Saving for Retirement Through Automatic Bank Withdrawals, Among Workers Not Currently Using Method................................................................................... 11 Figure 8, Retirement Educational Materials Used and Found Most Helpful, Among Workers Saving for Retirement ............................................................................................................ 11

EBRI Issue Brief No. 280 · April 2005 · www.ebri.org

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Figure 9, Most Useful Tools in Helping Save for Retirement ................................................................ 12 Figure 10, Likelihood of Using Employer-Provided Retirement Investment Advice, Among Workers Without Access ................................................................................................. 13 Figure 11, Workers Reporting Have Saved or Currently Save Money for Retirement .......................... 14 Figure 12, Worker Savings Goals ........................................................................................................... 14 Figure 13, Reported Total Savings and Investments .............................................................................. 15 Figure 14, Self-Estimate of Worker Progress in Planning and Saving for Retirement........................... 16 Figure 15, Factors Keeping Workers Behind Schedule in Planning and Saving for Retirement, Among Workers Behind Schedule in Planning and Saving for Retirement ........................................... 16 Figure 16, Expenses Keeping Workers Behind Schedule in Saving for Retirement, Among Workers Behind Schedule in Planning and Saving for Retirement.......................................................... 17 Figure 17, Reported Frequency of Selected Purchases, Among Workers .............................................. 18 Figure 18, Common Worker Expenditures (Once a Week or More Often), by Retirement Planning and Saving Progress and Current Saving Status ........................................................................ 18 Figure 19, Workers Reporting Types of Debt......................................................................................... 19 Figure 20, Worker Confidence in Having Enough Money to Live Comfortably Throughout Their Retirement Years ....................................................................................................................... 20 Figure 21, Retiree Confidence in Having Enough Money to Live Comfortably Throughout Their Retirement Years ....................................................................................................................... 20 Figure 22, Reasons for Retirement Confidence, Among Nonsaving Workers and Retirees Confident of Having Enough Money to Live Comfortably Throughout Retirement ................................. 21 Figure 23, Worker Confidence in Financial Aspects of Retirement ....................................................... 21 Figure 24, Confidence That Social Security Will Continue to Provide Benefits of at Least Equal Value to Benefits Received by Retirees Today ......................................................................... 23 Figure 25, Confidence That Medicare Will Continue to Provide Benefits of at Least Equal Value to Benefits Received by Retirees Today ........................................................................................ 24 Figure 26, Planned and Actual Retirement Age ..................................................................................... 24 Figure 27, Percentage of Preretirement Income in Retirement............................................................... 26 Figure 28, Descriptions of Retirement Financial Lifestyle..................................................................... 26 Figure 29, Calculated Life Expectancy for Workers, by Gender............................................................ 27 Figure 30, Largest Expected and Actual Sources of Income in Retirement ........................................... 28 Ruth Helman is research director at Mathew Greenwald & Associates, Inc. Dallas Salisbury is CEO of EBRI; Variny Paladino of EBRI is director of the Retirement Confidence Survey, a project of the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF); and Craig Copeland is senior research associate at EBRI. Any views expressed in this report are those of the authors and should not be ascribed to the officers, trustees, or others sponsors of EBRI, EBRI-ERF, or their staffs. Neither EBRI nor EBRI-ERF lobbies or takes positions on specific policy proposals. EBRI invites comment on this research. Note: The electronic version of this publication was created using version 6.0 of Adobe® Acrobat.® Those having trouble opening the pdf document will need to upgrade their computer to Adobe® Reader® 6.0, which can be downloaded for free at www.adobe.com/products/acrobat/readstep2.html This publication is available for purchase online. Visit www.ebri.org/publications or call (202) 659-0570.

EBRI Issue Brief No. 280 · April 2005 · www.ebri.org

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Overview

The 15th wave of the Retirement Confidence Survey® (RCS) points to potential solutions to the American retirement savings problem, specifically ways that could help workers save more through their employmentbased retirement plans. The RCS again finds that a strong majority of Americans are skeptical that Social Security will continue to provide benefits at least equal to those received by current retirees (although confidence of the American public in Social Security has actually risen over the past decade), and helps pinpoint a number of reasons why Americans may not be preparing adequately for retirement. In recent years, considerable effort has been made to educate the American population about savings, retirement planning, and financial education in an attempt to boost preparation for retirement. Despite this, the latest RCS also finds that the proportions of Americans who say they are saving for retirement and taking key retirement planning steps have remained stable. And paradoxically, at the same time that many Americans recognize that they are not doing enough to plan and save for retirement, they also express some level of confidence (in some cases, perhaps unrealistically high confidence) in their future retirement financial security. At base, however, the RCS reinforces a premise of financial education efforts, Choose to Save®—or, health permitting, work forever! New findings in this year’s RCS include: • While most Americans save for retirement through the workplace, steps can be taken to make workplace retirement savings plans even more successful. As other research has documented, workers surveyed in the 2005 RCS say an employer matching contribution is a major incentive to save for retirement. Seven in 10 nonparticipants say they would be much more or somewhat more likely to participate if the plan had a matching contribution of up to 5 percent of salary (72 percent). • Half or more think they would be much more or somewhat more likely to participate if the plan offered a “lifecycle” fund (66 percent); a provision that automatically raises workers’ contributions by a fixed amount or percentage when they receive a pay raise (55 percent); a matching contribution of up to 3 percent of salary (51 percent); or a “lifestyle” fund (49 percent). Fewer believe a managed account would persuade them to participate (35 percent). (“Lifecycle” funds are designed for specific age and income groups and automatically become more conservative as retirement nears, while “lifestyle” funds maintain a pre-set level of risk and generally have a mix of conservative, moderate, and aggressive investments; In managed accounts, a professional financial manager makes investment decisions based on responses to a questionnaire.) • Automatic enrollment in 401(k) plans, as opposed to waiting for the worker to sign up, could also increase plan participation and savings. Nonparticipants appear to accept automatic enrollment—40 percent say they would be very likely to stay in the plan if their employer automatically enrolled them in one, and 26 percent would be somewhat likely to do so. • Employers with a retirement plan can help their workers achieve investment diversification through the investment options they offer. Employers looking to help employees make more informed investment allocations may be able to do so more effectively by offering lifestyle or lifecycle funds rather than managed accounts. Among participants not currently offered these types of funds, 23 percent say they would be very likely to participate in a lifecycle fund, 21 percent would be very likely to participate in a lifestyle fund, and 15 percent would be very likely to participate in a managed account. • Workers1 are more likely to save through the workplace than on their own. More than 8 in 10 eligible workers say they participate in a workplace retirement savings plan (82 percent); 38 percent of workers have an individual retirement account (IRA). Promoting plans that allow automatic withdrawals from individual bank accounts may not significantly increase non-workplace savings. In this case, ignorance is not the issue: Nearly 7 in 10 of those who do not currently use automatic withdrawals for retirement savings are already aware that they have this option (68 percent).

EBRI Issue Brief No. 280 · April 2005 · www.ebri.org

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• More than half of workers (55 percent) describe themselves as being behind schedule when it comes to planning and saving for retirement. Twenty-three percent say they are a little behind schedule and 32 percent say they are a lot behind schedule. Those behind schedule most often (51 percent) cite high expenses as playing a major role in keeping them from doing better, specifically everyday expenses (49 percent), child-rearing expenses (39 percent), and medical costs (35 percent). Other findings from the 2005 RCS include:

• While 7 in 10 workers report that they and/or their spouse have saved for retirement (69 percent), by their own account most workers have very little money set aside. More than half (52 percent) report that the total value of their savings and investments, excluding the value of their primary home, is less than $25,000.

• The majority of workers continue to be at least somewhat confident about their financial security in retirement. One in four are very confident (25 percent) and 4 in 10 are somewhat confident (40 percent) that they will have enough money to live comfortably throughout their retirement years. Even 37 percent of workers who have not saved at all for retirement say they are at least somewhat confident of having enough money for retirement.

• While retirement confidence is related to retirement preparation, there are indications that at least some of those who say they are very confident about their financial prospects in retirement are overconfident. Twenty percent of those who say they are very confident are not currently saving for retirement, 52 percent do not have an IRA opened with money saved outside of an employer’s retirement plan, and 37 percent have not done a retirement needs calculation.

• Postponing retirement and working for pay in retirement continue to be favorite worker strategies to make up for inadequate retirement preparation. While some workers may find these strategies are successful, others may find themselves forced to retire with fewer resources than they would like. Four in 10 retirees report that they retired earlier than expected, usually due to negative reasons such as poor health or changes at their company. Many current workers are likely to find themselves subject to similar health and workplace stresses when they reach retirement age.

• Workers may also underestimate how much of their preretirement income they will need to replace in order to fund an adequate lifestyle in retirement. While half of retirees say they use 70 percent or more of their preretirement income to fund a retirement lifestyle that is at least adequate, a majority of workers expect they will need less than 70 percent of their preretirement income to do the same.

• Only a minority of workers take the time to estimate how much it will take to fund a comfortable retirement. Slightly more than 4 in 10 have attempted to do a retirement needs calculation (42 percent). However, even among those who say they have made the effort, some use methods that may yield less-than-reliable results, such as doing their own estimate (37 percent) or guessing (10 percent).

• A retirement savings calculation appears to be an especially effective way to affect retirement preparation behavior. Among the 42 percent of workers who have done a calculation, 44 percent say they have made changes as a result, usually starting to save more money (52 percent). Other evidence that a retirement savings calculation is effective can be gathered from the fact that, compared with those who do not, workers who complete the calculation appear to set more realistic savings goals and are more likely to be ahead or on track in planning and saving for retirement.

• When asked what would be the single most useful thing in helping them save for retirement, workers themselves most often identify having access to a professional financial advisor (27 percent). In addition, workers say they would be most likely to take advantage of employer-provided professional investment advice if it were offered in-person (25 percent very likely, 39 percent somewhat likely) rather than online (16 percent very likely, 29 percent somewhat likely) or by telephone (8 percent very likely, 20 percent somewhat likely).

EBRI Issue Brief No. 280 · April 2005 · www.ebri.org

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What Works? Retirement Savings Needs Calculation The majority of American workers have not tried to calculate how much they need to save for retirement, yet doing this calculation can positively impact retirement planning and savings behavior. Only 42 percent of workers report they and/or their spouse have 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. This percentage is statistically unchanged since 2001. Figure 1 Workers Having Tried to Calculate How Much Money They Will Need to Savea

60%

53%

Respondent

51% 48%

Respondent and/or Spouse

50%

42%

45%

44%

43%

40% 31%

32%

1994

1995

33%

42%

38%

39%

42%

37% 32%

29%

30% 20% 10% 0% 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1994–2005 Retirement Confidence Surveys. a

The addition of the phrase "and/or your spouse" for the question wording for married respondents starting in 1999 is responsible for approximately 4

to 5 percentage points of the increase between 1998 and 1999.

The likelihood of doing a retirement savings needs calculation increases with household income, education, and the amount of savings and investments. In addition, married workers are more likely than unmarried workers to have tried to do one. Savers (compared with nonsavers), participants in a defined contribution plan (compared with nonparticipants and those not offered a plan), and those saying they are ahead of schedule or on track (compared with those behind schedule) more often report trying to do a calculation. In addition, among those with household income less than $35,000, workers with access to employer-provided retirement planning information or investment advice are more likely than those without access to say they have attempted a calculation. Doing a retirement savings needs calculation tends to change savings behavior. Forty-four percent of those who do a calculation report they make changes as a result. Most often, those who do a calculation say they start saving more (52 percent), but other steps they take include changing the allocation of their money (13 percent), starting to save less (11 percent), researching other savings methods (10 percent), reducing debt (5 percent), and opening new accounts (5 percent). Evidence of the success of doing a retirement savings calculation also comes from other results. Less than 2 in 10 workers think they need to accumulate $500,000–$999,999 to have a comfortable retirement (18 percent), while less than 1 in 10 each believe they need to save $1 million–$1.49 million (8 percent) or $1.5 million or more (7 percent). Yet workers who do a calculation are more likely than those who do not to estimate that they need higher amounts, even when household income is held constant.

EBRI Issue Brief No. 280 · April 2005 · www.ebri.org

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Figure 2 Amount of Savings Needed for Retirement, by Doing a Retirement Needs Calculation

Under $250,000 $250,000–$499,999 $500,000–$999,999 $1 million–$1.49 million $1.5 million or more Don’t know/Don’t remember Refused

Total 32% 21 18 8 7 10 2

Did Retirement Needs Calculation? Yes No 23% 38% 21 22 21 16 11 6 11 5 8 11 4