Retirement Confidence: On the Mend

After dropping to record lows between 2009 and 2013, the percentage of workers confident about having enough money for a comfortable retirement, continues to increase, according to the 2015 Employee Benefit Research Institute Retirement Confidence Survey. 22 percent of Americans are now very confident (up from 13 percent in 2013 and 18 percent in 2014), while 36 percent are somewhat confident. That’s the good news. Unfortunately, 24 percent are not at all confident (statistically unchanged from 2013 and 2014). EBRI notes that confidence is strongly related to whether or not people have retirement plans. Among those with a plan, the percentage of very confident doubled from 14 percent in 2013 to 28 percent in 2015.

The fact that 67 percent of all workers (or their spouses) – and 78 percent of full time workers – have saved for retirement is misleading, because total savings remain low. A staggering 57 percent say total value of savings and investments is less than $25,000, including 28 percent who have less than $1,000. As you would expect, retirement savings increase with household income and education.

Lack of education has become a big problem for Americans. According to research from the Hamilton Project, the median, inflation-adjusted earnings of men without a high school degree fell by 20 percent between 1990 and 2013 and for women, earnings fell by 12 percent. In contrast, both men and women with a bachelor’s degree saw their earnings rise between 1990 and 2013, by 7 and 16 percent respectively.

With median income dropping, it’s no wonder that half of the respondents to the EBRI survey said that cost of living and day-to-day expenses were the two main reasons that they are not saving (or saving more) for retirement. Even so, it is still amazing to learn that even those who are under pressure say that they could save $25 a week more than they are currently saving.

Instead of saving more, respondents are relying on a later retirement date. In 1991, just 11 percent of workers expected to retire about age 65. This year, the number has more than tripled to 36 percent. Working longer always sounds like a great solution, but what happens if your boss hasn’t bought into your plan, or you have a job that is too physically demanding to continue late in life? In fact, while 67 percent of workers say they plan to work for pay after they retire, just 23 percent of retirees report they have actually worked during retirement.

It should also be noted that while 63 percent of today’s retirees say that Social Security is a major source of income in their retirement, about half that number (31 percent) of current workers expect Social Security to be a major source of income in retirement. That result probably speaks to a misunderstanding of the current state of the Social Security system.

According to The 2014 Annual Report of the SS Board of Trustees, the trust funds' assets are now $2.76 trillion and should keep growing through 2019. After 2033, the annual revenue from taxes will still be enough to cover 75 percent of future costs, so while many say flippantly, “Social Security won’t be there for me,” the numbers say otherwise.

Finally, the EBRI survey found that most people do not like to step on the scale to see just how much work they need to do. Just 48 percent have tried to calculate how much money they will need in retirement. For the other 52 percent, EBRI’s Choose to Save Ballpark E$timate is a great resource to crunch numbers. You can even play with some of the variables to see the impact of working longer, saving more and living longer. Retirement confidence may be influenced by a variety of external factors, but it is clear that those who take action will likely feel a lot better.

Retirement Reboot: How to Calculate Your Number

The 2014 Employee Benefit Research Institute Retirement Confidence Survey is out and the news is mixed. After dropping to record lows between 2009 and 2013, the percentage of workers confident about having enough money for a comfortable retirement, increased in 2014. 18 percent are now very confident (up from 13 percent in 2013), while 37 percent are somewhat confident. 24 percent are not at all confident (statistically unchanged from 2013). As you might expect, the higher the household income, the more confidence increased. Nearly two-thirds of all workers (or their spouses) – and 79 percent of full time workers – have saved for retirement. But the total savings level varies dramatically. 36 percent say they have less than $1,000 (up from 28 percent in 2013) and 68 percent with household income of less than $35,000 a year have savings of less than $1,000.

Why don’t we save more? More than half of respondents say that there’s nothing left after paying for general cost of living and day-to-day expenses. Data bear out the conundrum: As noted in House of Debt, real income for the median U.S. family doubled from 1947 to 1980, when the rising tide of productivity lifted all boats. However, “while the United States is producing twice as much per hour of work today compared to 1980, a small part of the gain in real income has gone to the bottom half of the income distribution,” as the share of profits has risen faster than wages and the highest paid workers are getting a bigger share of the wages that go to labor.

The double whammy of disappearing pension funds and stagnant income has put many Americans behind the eight ball for retirement. The U.S. ranked a dismal 19th in the 2014 Natixis Global Retirement Index. As it turns out, despite having one of the highest per capita incomes in the world, U.S. income inequality and health expenditures are high compared to other countries. (Four Nordic countries, Finland, Sweden, Denmark and Norway are best performers, despite relatively high tax burdens.) You are allowed to spend two minutes lamenting the fact that you don’t live in a Nordic country, before getting to work.

The first step in your retirement planning process to is to determine where you stand today. Check out EBRI’s Choose to Save Ballpark E$timate or go to your retirement plan/401(k) website, where there is likely a retirement calculator. Many of these tools require you to estimate several factors. My crystal ball isn’t perfect, but here are some sensible estimates that should help:

• Inflation assumption: 4.5 percent (significantly higher than where we are today, but most economists believe that inflation is headed up in the coming years).
• Rate of investment return both before and after retirement: Consider your risk tolerance and err on the side of being conservative. If you’re stuck, use 4-6 percent. Obviously, if you use a higher rate of return, the calculator will ultimately determine that you have to save a smaller amount.
• Life Expectancy — if you are younger than 50, use 95; if you’re older than 50, use 90. If you want a closer estimate, go to http://www.livingto100.com and use their Life Expectancy Calculator, which takes into account your personal and family medical history.
• Retirement Income Need: Many calculators will take a percentage of your pre-retirement earnings (many use 80 percent) as a baseline for what you will need in the future — sometimes called a “replacement rate.” A more precise way to determine that number is to figure out how much you spend today, isolate those expenses that won’t occur in retirement (so for example: mortgage payments; tuition; child care; commuting expenses) and poof, you have your replacement rate. Assume that the money you were paying in FICA taxes will be necessary to pay some or all of higher health care costs in the future, so leave that amount in for your calculation.

After accounting for what you have saved thus far and what you plan to contribute in the future, the calculator will spit out your retirement savings goal. The number may seem absurdly large, but do the best you can right now and hopefully, as your financial conditions improve, you will be able to contribute more. The process may seem daunting, but I promise that you will feel better by doing something.