Data & Research July 12, 2016

Relatively Few Americans Enter Retirement Debt Free

Among middle-income Boomers, that surges to 77%.

Reported by

Bankers Life Center for a Secure Retirement took a look at the debt levels and confidence of pre-retirees and retirees, particularly middle-income Boomers, and found that they are in poor shape.

Just over half, 53%, of all Americans think that they will enter retirement debt-free, but only 23% do so. Eight in 10 middle-income Baby Boomers not yet retired currently carry some debt, and among those who are retired, 77% still carry debt.

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Bankers Life defines middle-income as those with an annual household income between $25,000 and $100,000 and less than $1 million in investable assets. The research organization decided to take a look at the status of Boomer retirees as it has been five years since the first Boomer turned age 65.

Nearly four in 10 retired Boomers, 38%, have had to adjust their spending to compensate for a financial shortfall in retirement, and in 2015, 60% of non-retired Boomers are spending “as much as or more than their household incomes.” Among this group, the majority carry debt and other significant monthly expenses. Among the retired Boomers who have had to adjust their spending, 88% cut expenses, 30% sold possessions, 20% went back to work, 15% have sought help from family or friends, and 7% have either sold or remortgaged their house.

Nearly seven in 10 Boomers, 69%, do not know if they will have enough money to live comfortably until age 85, which is the Social Security Administration’s (SSA’s) projection for their life expectancy. Eighty-three percent do not think they will have the resources to live until age 95, even though the SSA says that 10% of Boomers will reach that age.

Only 9% of those surveyed said they were very prepared for retirement, yet 39% have not taken any active retirement planning steps. Only 28% of retired middle-income Boomers say they were financially prepared when they retired. Seventy-eight percent of non-retired middle-income Boomers plan to start taking Social Security when they turn 65, yet only 38% actually do so, and only 51% are confident in their understanding of annuities. About the same percentage, 48%, believe they are knowledgeable about Roth IRAs.

NEXT: How many middle-income Boomers have pensions?

Because the oldest Boomers started working at a time when pensions were commonplace and 401(k)s were only just being created, 48% of already-retired middle-income Boomers receive a pension. Conversely, among non-retired Boomers, only 33% expect to receive a pension.

Middle-income Boomers are not doing enough to plan for their retirement, the study also found. Seventy-five percent of this demographic group have not calculated a monthly retirement income goal that they need to reach, and 79% do not know what percentage of their pre-retirement income they will need to live on. Thirty-two percent did not start planning for retirement until after age 50, and 58% didn’t start planning until after age 40.

Bankers Life Center for Retirement’s study, “Paying for the New Retirement: Responsibilities and Challenges for Middle-Income Boomers,” concludes that the Boomer experience “may provide a cautionary tale for generations to follow. More education, more advice and guidance, and ultimately more retirement savings will be necessary for middle-income Americans to live comfortably in their retirement years.”

The Center recommends that middle-income Boomers research Social Security options, aggressively pay down debt, minimize monthly bills, remain in the workforce for as long as possible and develop a well-thought-out retirement plan.

“Americans tend to prepare for what they can anticipate,” says Scott Goldberg, president of Bankers Life. “Most do not anticipate the amount of debt they will carry into retirement, in addition to other unplanned expenses such as long-term care and various health-related costs. Our studies show us that few Boomers are taking the steps to plan for and overcome these hurdles.”

The full report can be downloaded here.

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Data & Research July 12, 2016

Most Americans Haven't Done Much Retirement Planning

While most current retirees are managing finances well due to multiple sources of income, those not yet retired are worried about running out of money in retirement, FINRA finds.

Reported by

Rebecca Moore

The majority of Americans do not appear to have done much retirement planning, according to the Financial Industry Regulatory Authority’s (FINRA’s) report, “Financial Capability in the United States 2016.”

Despite the study’s finding of overall improvement in Americans’ ability to make ends meet, the percentages of those who have planned for retirement or have a retirement account are little changed since 2009. In 2009 37% had tried to figure out their retirement savings needs, compared to 39% in 2015. Fifty-seven percent of Americans had employer-sponsored or individual retirement accounts in 2009, while 58% had them in 2015.

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Respondents with lower income levels are much less likely to be prepared for retirement than those with higher incomes. Only 19% of those with incomes less than $25,000 have tried to plan for retirement, compared to 60% of those with $75,000 or more in income. Similarly, the likelihood to have a retirement account increases dramatically with income, such that only a small minority of respondents with less than $25,000 in income have a retirement account (18%), while a strong majority of respondents with $75,000 or more income have one (87%).

Respondents who feel they are working towards long-term financial goals are much more likely than those who do not to have calculated retirement savings needs (53% vs. 17%) and to have a retirement account (67% vs. 42%). Among respondents who reported planning for time horizons of more than 10 years, more than half (57%) have tried to calculate their retirement needs, and nearly three-quarters (73%) have a retirement account.

NEXT: Those with retirement income report less difficulty making ends meet

The study finds that more than half of Americans (56%) are worried about running out of money in retirement. Women are somewhat more likely than men to be worried about running out of money in retirement (59% vs. 53%, respectively). Respondents ages 35 to 54 are the most likely to be worried (65%), followed by those 18 to 34 (57%). While those in the highest income group ($75,000 or more) are less likely than those with lower incomes to be worried about retirement, more than half of them are worried.

Among non-retired respondents, those who have tried to calculate retirement savings needs are slightly more likely than those who have not to be worried about having enough money in retirement (64% vs. 59%). Non-retired respondents with retirement accounts are just as worried as those without retirement accounts (62% vs. 60%).

Respondents who receive retirement income (pension plans, Social Security, or withdrawals from retirement accounts) are the most likely to have no difficulty making ends meet. This may be due in part to the higher likelihood of having multiple income sources among these respondents, the report says. For example, among those receiving pension payments, 95% have at least one other additional source of income (out of the seven listed in the survey). In contrast, among those receiving salaries or wages, only 55% have more than one source of income.

Nearly two-thirds (65%) of respondents receiving income from a traditional pension plan report no difficulty making ends meet. Fifty-seven percent of those receiving Social Security retirement benefits report no difficulty, as do 55% of those receiving withdrawals from retirement accounts (e.g., 401(k), IRA, Keogh).

NEXT: Risk tolerance and financial literacy

An important determinant of how people choose to invest their savings and retirement wealth is their attitude towards financial risk. Only about one in five Americans (21%) say they are willing to take financial risks. However, risk tolerance has increased considerably relative to 2009, when 12% of respondents reported being willing to take risks. Men are much more likely than women to say they are willing to take risks in financial investments (28% vs. 14%, respectively).

To evaluate financial knowledge, respondents were exposed to a series of questions covering fundamental concepts of economics and finance that may be encountered in everyday life, such as calculations involving interest rates and inflation, principles relating to risk and diversification, the relationship between bond prices and interest rates, and the impact that a shorter term can have on total interest payments over the life of a mortgage. The survey reveals relatively low levels of financial literacy among Americans as measured by these standard questions. While the correct response to some individual questions reaches 75%, only 14% of respondents were able to answer all five questions correctly, and 37% were able to answer at least four questions correctly.

Slightly less than one-third of respondents (31%) report having been offered financial education at a school, college, or workplace, and 21% say they participated. On the surface, exposure to financial education appears to be associated with better performance on the financial literacy quiz questions. Respondents who stated that they participated in financial education score higher than those who were offered but did not participate, who in turn score higher than those who were not offered financial education.

However, the report says it is important to note that these findings do not imply a causal relationship between financial education and financial literacy, and may be entirely attributable to differences in education, employment, and other demographic factors. It is also possible that those who are more interested in financial literacy might be more likely to seek out financial education.

A copy of the full report can be found at www.USFinancialCapability.org.