Retirement Education Is Not Enough

Survey Says This spring, HSBC Bank released the U.S. version of its global report on worker beliefs, The Future of Retirement. The good news: The survey's answers are mostly on track. Retirement issues are widely discussed in the media, usually responsibly (as opposed to, say, political topics), and that knowledge seems to have permeated.

To wit, here are the survey’s key findings, garnered from interviews with working-age Americans.

1. Healthcare — 82% believe that future retirees will need to spend more on healthcare costs than do today’s seniors.

Spot on. Medical inflation continues to increase faster than the Consumer Price Index, and Washington is quite unlikely to repeal and replace the Affordable Care Act with a bill that spends more government monies, and which cuts retirees' direct costs. Expecting lower future healthcare expenses would be the triumph of hope over experience.

2. National debt — 76% believe that addressing the national debt will cause the government to cut its spending on the elderly (Social Security, healthcare).

This also seems likely. The federal government is quite capable of kicking the national-debt can further down the road, and there’s also the modest possibility that Washington adopts more of a European mindset and raises taxes, to pay down the national debt while still maintaining retiree benefits. But overall, that seems about the correct percentage.

3. Ongoing employment — 65% expect to work during retirement.

That percentage is too high. In addition to those who need not work during retirement—either because they possess more assets than they know what to do with, or because they economize—there will be many who cannot work. They will be unemployable, because of ill health or because their skills don't lend themselves to post-retirement work. (Not everybody can consult.) However, that two thirds of Americans plan to stay employed indicates that people understand the financial reality.

4. Interest rates — 52% believe that low interest rates mean they will need to work for longer.

The public is split for good reason—there’s no sensible way to answer that question. Low after-inflation yields would suggest that retirees won’t profit much from their financial assets, and thus will need larger nest eggs, but low interest rates? You got me; for all I can figure out, that might mean that retirees should eat more bananas. Give the people full credit for punting on that question.

5. Financial expectations — 41% believe that they will be financially comfortable during retirement, based on their current savings.

That seems reasonable. Although some studies arrive at a lower figure, their calculations tend to assume an aggressive interpretation of “comfortable” (such as earning at least 80% of peak working income during retirement). With a more relaxed definition of the term, something near half the current workforce looks to be on track.

6. Investments — 37% think that real estate will deliver the highest return for retirement savings.

I would have expected the answer to be higher. Relatively few workers are true stock-market owners. Most either don’t hold equities at all (half the country’s employees lack access to 401(k) plans), or have been defaulted into a target-date fund. Whereas everybody knows about real estate.

I don’t think this answer is technically accurate. Given that most homes are purchased on leverage, plus the tax advantages that are given to both mortgages and home sales, I expect most workers’ homes to outgain a stock portfolio, after taxes. However, the spirit is certainly correct—given its idiosyncratic risk (and lack of liquidity), a home should not be regarded as the anchor for retirement savings.

However, respondents botched the follow-up question of whether stocks or cash were the better retirement-savings option. They rated the two as being roughly equal. Of course, such is not the case. Investment math remains perhaps the least understood topic of retirement planning.

7. Expected Retirement Age — The average response was 61 years.

Once again, this answer is both wrong and right. If the goal is to have all Americans enjoy a secure retirement, that age is insufficient. Most workers won’t save what they need before Social Security payments even begin. On the other hand, given that a large minority of people won’t be able to work during their sixties, even if they so desired, the response is realistic. Today, the average retirement age is 63. Despite some speculation to the contrary, things probably won’t change much in the future.

Words Into Deeds For me (not HSBC, which takes the material in a different direction), the survey's conclusion is straightforward: General retirement education has succeeded. Today's workers have a pretty good idea of how long they will be employed for the full time, that they will likely need to work after their official retirement date, and of the fact that their healthcare bills will likely grow, not shrink. They remain somewhat lost with investment topics, which is why half of the survey's respondents quite sensibly expect to seek some sort of professional assistance.

All to the good. Unfortunately, awareness does not pay the bills. Although most Americans understand the retirement landscape, so that they can collectively give sound answers when questioned, their savings habits have not kept pace with their insight. The median 401(k) contribution rate is 6%, rather than the 10%-plus rate that is required to make the numbers work. And that is for the retirement elite—those who not only enjoy access to a 401(k) plan, but who also participate. The prognosis is significantly worse for those who do not.

The lesson for overall retirement planning is the same that the 401(k) industry learned during the 1980s and 1990s: Education alone is insufficient. Seminars and articles that are met by nods of approval, but not new savings habits, are not enough. The 401(k) response was to seize the initiative from employees. Default them into a plan rather than require them to act.

My suspicion is that a similar step will be needed to bridge the current gap between perception and reality—that workers will need to be pushed to convert their knowledge into investment savings. How such a task might be achieved is a subject for another time. Today's point is that the educational task has largely been accomplished. The message has been read. What is needed now is a way to change behavior. That is where the nation's retirement discussions must head.

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.