Confronting Retirement Planning

Survey Says On Monday, the Alliance for Lifetime Income, a consortium of annuity providers, sent me the summary of a new survey, on "Retirement Income Anxieties." The material was under embargo until 12:01 this morning, which was touching. They trusted me! (Without reason, since I had not previously heard of this organization.)

Resisting the temptation was not difficult, as the survey contained no grave secrets. It was, however, instructive. The findings not only identified retirement trouble spots--the Alliance's goal, since it wishes to issue a call to action--but also some encouraging pockets.

See No Evil The survey's biggest news is no news at all: Working Americans don't know much about their retirement finances.

Eighty percent of the survey’s non-retired participants were, to some degree, “anxious” that they would generate enough income during retirements. One can’t blame them, as three respondents in five believed that they would outlive their retirement savings. (Curiously, half of those who reported being “somewhat anxious” about their retirements were among that group. Somewhat anxious?)

Not that the respondents really knew. Fewer than 30% of non-retirees have attempted to determine their monthly retirement income needs. That is not entirely surprising, given that many employees are decades away from leaving the workforce. More remarkable, however, is that only 57% of those aged 55 or older have made such calculations.

The conclusion is undeniable. Most Americans avoid retirement planning. Running the numbers resembles a dental visit. The process is unpleasant, plus there’s the worrisome possibility that the effort will uncover worse problems yet. Best to postpone to the trip … next year. Only with the dentist, hygiene eventually compels the trip. Nothing necessitates retirement planning, until the date itself finally arrives.

Excuses, Excuses The reasons that respondents gave for bypassing retirement planning were familiar.

The first, third, and fifth most common answers involved the means. The subject “didn’t have enough money,” or was burdened by debt, or was saving for other purposes. Setting assets aside for retirement would be a step too far--if not more. And since they weren’t growing their retirement kitties, they certainly did not wish to do the planning. They knew where that inquiry would lead.

Next came the enormity of the task. The second-largest response was “there are too many unknown factors.” A bit further down came “it’s too overwhelming to think about” and “I don’t know what to do, to plan for retirement.” To an extent, such confusion need not be troubling, because one can save without foreseeing the journey’s end. However, the bewilderment often inhibits action.

The final remarks were made from desperation. The subject was focused on meeting everyday needs, or could not think about the topic because of health needs, or was simply too busy. The last is my favorite; the average American watches 35 hours of television weekly, and surfs the Internet for 24 more hours, but is “too busy” to consider retirement finances. More like, would prefer to do almost anything but plan for retirement, but doesn’t wish to state that directly.

Fear Itself So far, so bad. Generally speaking, workers have only the fuzziest idea of their retirement finances; are not confident of their eventual success; and are unlikely to change their ways. If they cannot find sound reasons to avoid retirement planning, they will invent unsound ones. None of that is encouraging.

There is, however, an optimistic twist to the survey. As previously mentioned, most pre-retirees doubt that their retirement savings will suffice. Only 42% expect their financial resources to survive longer than they do. The percentage is far higher for those who currently are retired. Seventy-one percent of those who are already retired believe that their assets will outlive them.

The Alliance credits part of this discrepancy to the decline of traditional pension plans. Many current retirees possess them, but few of today’s workers will receive such benefits. That explanation is correct. On the other hand, it is not complete. That 29-percentage-point gap between expectations and realization is very large, and pensions will not be disappearing entirely. Those for private employees are almost extinct, but government defined-benefit plans continue to exist.

Something else is feeding the gap. It is, I believe, the difference between the fears and reality. To be sure, living on a fixed income, without being able to work one’s way out of financial mistakes, is difficult. But the fears about what retirement might bring are worse yet. For many Americans, the retirement future that they would not confront, because they felt unprepared, was better than expected once it did arrive.

This is not to downplay the seriousness of the situation. That three out of 10 current retirees believe that they will run out of money is not praiseworthy. This problem is not new--the U.S. has never enjoyed significantly higher success rates--but neither should it be taken for granted. The U.S. retirement system could stand much improvement. But I do think that for many workers, their retirement finances will be better than they expect.

Required Coursework Which leads to a recommendation: Teach Household Economics in school. Not just once, but on an ongoing basis, as schools do with, say, the Constitution.

The need is obvious. For the foreseeable future, U.S. workers will be forced to plan for their own retirement futures. As outlined by the Alliance’s survey, they cannot accomplish the task. These people have never been taught the basics. When they were students, nobody walked them through the personal economic cycle. Nobody made them feel comfortable making financial decisions. Thus, retirement planning became something for employees to avoid.

There are ample precedents for teaching Household Economics. In my day, boys took woodwork, girls studied cooking and sewing, and both genders typed. Such classes taught lifetime skills, not academic topics. The list of critical lifetime skills has changed, which is why those courses are no longer required. But the importance of such skills remains. Not least among them is Household Economics.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.