Data & Research October 20, 2020

Fear of Retirement Spending Worsened by Pandemic

Retired households with less than $200,000 accumulated in a DC plan at retirement tend to spend down only about a quarter of their assets during the first two decades of retirement.

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Wells Fargo has published its 2020 “Wells Fargo Retirement Study,” based on a survey of roughly 4,600 people conducted in August by The Harris Poll.

The annual research report examines the attitudes and savings behaviors of working adults and retirees, with this year’s edition coming amid the heart of a pandemic and the worst recession in generations. Naturally, the researchers included many pointed questions about the COVID-19 crisis, but they also focused on the important and evolving topic of defined contribution (DC) plan decumulation.

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Speaking during a conference call introducing the new research, Nate Miles, head of DC business at Wells Fargo Asset Management, said there is no doubt that COVID-19 has driven some workers even further behind in their retirement goals. Notably, working men report median retirement savings of $120,000, while working women report $60,000.

“Yet for those impacted directly by COVID-19, by a job loss or in other ways, men report median retirement savings of $60,000, which compares to $21,000 for women,” Miles said. “With individual investors now largely responsible for saving and funding their own retirement, disruptive events and economic downturns can have an outsized impact on workers who are already more vulnerable to financial challenges.”

As the Wells Fargo survey has shown year in and year out, working Americans, and even the most disciplined savers, are not saving enough for retirement.

“The good news is that for many of today’s workers, there is still time to save and prepare,” Miles said.

The Pandemic’s Uneven Impact

The study finds that different demographic groups are, on average, experiencing very different financial impacts from the pandemic. The data makes it clear that women and younger generations are falling behind their savings goals more often than older men.

“Women are less sure if they will be able to save enough for retirement, and they appear to be in a more precarious financial situation than men,” Miles warned. “Barely half of working women say they are saving enough for retirement, or that they are confident they will have enough savings to live comfortably in retirement.”

The data suggests women directly impacted by COVID-19 have saved less than half the amount for retirement that men have and are much more pessimistic about their financial lives. In addition, women impacted by COVID-19 are less likely to have access to an employer-sponsored retirement savings plan and are less likely to participate if they do have access.

Though Generation Z workers started saving at an earlier age and are participating in employer-based savings programs at a greater rate than other generations, they are nonetheless also worried about their future. Fifty-two percent of Generation Z workers say they don’t know if they’ll be able to save enough to retire because of COVID-19, 50% say they are much more afraid of life in retirement due to COVID-19, and 52% say the pandemic took the joy out of looking forward to retirement.

At the same time, the study shows that despite a challenging environment, many American workers and retirees remain optimistic about their current life, their finances and their overall future. A majority of workers say they are very or somewhat satisfied with their current life (79%), in control of their financial life (79%), are able to pay for monthly expenses (95%), and feel confident they are able to manage their finances (86%).

The Decumulation Challenge

Despite an increasing shift to a self-funded retirement, nearly all workers and retirees say that Social Security and Medicare play or will play a significant role in their retirement—a reality underscored by the pandemic.

According to the study, 71% of workers, 81% of those negatively impacted by COVID-19, and 85% of retirees say that COVID-19 reinforced how important Social Security and Medicare will be or are for their retirement. Overall, workers expect that Social Security will make up approximately one-third of their monthly budget (30% median) in retirement. And even among wealthy workers, Social Security and Medicare factor significantly into their planning.

Of course, the dependence by many on the programs also drives anxiety, especially at a time of substantial political division in the U.S. The vast majority of the study’s respondents harbor concerns that the programs will not be available when they need them and they worry that the government won’t protect them.

A Spending Paradox

Lori Lucas, president and CEO of the Employee Benefit Research Institute (EBRI), also participated in the research call. She highlighted a finding in the data that suggests people are reluctant to actually spend down their DC plan assets.

“This is puzzling because of what we know about the lack of retirement assets and confidence reported by workers and retirees,” Lucas said.

The data shows that retired households with less than $200,000 at retirement tend to spend down only about a quarter of their assets in the first two decades of retirement. The group with the greatest amount of assets, on average, spends down just 11% of DC plan assets during this time frame.

“This is a dynamic that we are going to be studying further and that I expect to evolve in coming years, as more people enter retirement without pensions and significant amounts of assets outside of their DC plans,” Lucas said. “Not only do we need to help people save enough. We should also figure out ways to help these people who get to retirement with a nice nest egg, but who don’t know how to spend it down. In fact, we don’t really know yet with confidence why they are not spending these assets.” 

Lucas said that, anecdotally, it is common to hear retirees say they want to maintain their balance, either because they’re motivated to leave behind their assets for loved ones, or because they want to avoid losses. Many retirees also simply say they do not need to spend a lot of money to be happy in their lifestyle, and that they get a sense of satisfaction and security by maintaining their wealth even as they age.

“We very commonly see serious loss aversion among retirees,” Lucas said. “Beyond investment losses, many people actually see spending as a loss in retirement. Seeing their accumulated assets wind down is just too painful for some people. For this reason, I think the majority of people will tell you their goal is to maintain their assets during retirement.”

Lucas said this is in some ways a laudable goal, but there is certainly more room for the retirement plan industry to create innovative spending solutions to help people meet all their retirement goals.

The Markets October 20, 2020

Further Stimulus Said to Be Already Priced into the Markets

The failure to pass a second fiscal stimulus package is causing volatility, experts said, adding to the normal pre-election jitters.

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During a webinar Tuesday, “With U.S. Election 2020 Upon Us, Where Is an Investor to Go?” sponsored by Franklin Templeton, investment managers explored how various sectors of the markets would react if Democratic candidate Joe Biden was elected president or if Republican candidate President Donald Trump was re-elected to a second term. 

Jeffrey Schulze, an investment strategist with ClearBridge Investments who moderated the webinar, said, “While there is conflicting data on the economy and the election, only three incumbent presidents in the modern era have not been elected for a second term, and that was when there was a rise in unemployment in those years. When the GDP [gross domestic product] rises less than 1%, you tend to lose the election as the incumbent.” 

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That has been the case this year, with record unemployment numbers as a result of the COVID-19 pandemic. On the other hand, Schulze continued, “Historically, when the markets have risen three months before Election Day, the incumbent is elected.” The markets, indeed, were on an upward trajectory three months before Election Day.

Despite these conflicting inputs, one thing is for certain between now and Election Day, Schulze said. “The failure to pass a second fiscal stimulus package is causing volatility,” he said. “We can expect higher volatility as we get to and through Election Day.” 

Julien Scholnick, a portfolio manager with Western Asset Management Co. LLC, agreed with Schulze that it is nearly impossible to predict which candidate will be elected. Therefore, Western Asset Management’s portfolio “is not dependent on any one outcome,” Scholnick said. As to how the fiscal stimulus will affect the markets, he said the markets expect a bill to be passed and have priced it in. 

However, if Biden is elected and the Democrats take the majority of the Senate seats, it is likely that the stimulus will be several trillion dollars, whereas a Republican win would likely result in a $1 trillion to $2 trillion package, Scholnick said. 

As far as the bond market is concerned, Scholnick said the Federal Reserve’s policy to keep interest rates near zero “is supportive for spread products, and we are overweight spread on the back end of the curve.” 

As to how state and local governments have been faring throughout the COVID-19 pandemic, Jennifer Johnston, a municipal bond senior research analyst with Franklin Templeton, said that because their economies are so heavily dependent on taxes from tourism, trade and transportation—and, in some states, oil and gas—they have been hit hard by the coronavirus. That said, Johnston continued, “Thankfully, they were coming off a long expansion period, with many having budget surpluses, so their economic perspective has been strong, helped as well by the fact that many communities are reopening and revenues are coming back.” 

State and local governments historically have had very low bankruptcy and default rates, which has also helped them through the downturn, Johnston said. Furthermore, many states and local governments have laws that do not allow them to file for bankruptcy, she said.  

However, she added, should another serious wave of the virus continue this fall, state and local municipalities will be “critically dependent on a fiscal stimulus for their fiscal year 2022 budgets to replace lost revenues.” 

As to when a vaccine might be available, Marshall Gordon, senior research analyst, health care, with ClearBridge, said Pfizer and Moderna are leading the way with trials for a vaccine that would consist of two doses. Both companies are conducting large-scale trials among 30,000 to 50,000 people. It is possible those vaccines will be brought to the market at the end of November, “but we won’t know until the end of the year or maybe next year whether these vaccines are safe enough for a broad population,” he said 

If the vaccines get emergency use authorization, they will first be offered to front-line medical workers and the staff and residents of nursing homes in the first or second quarter of next year, Gordon said. After that, they will be offered to older people on down beginning in the third or fourth quarter of next year, he said. Gordon stressed that he does not expect the government will require people to take the vaccine, “so it remains to be seen when the majority of people will be able to participate in an unfettered economy,” Gordon said. Beyond that, it could take another two to three years for a vaccine to reach emerging markets, he said, so it will be a slow process to eradicate the virus. 

Even though Biden is supportive of “greener” energy policies relative to President Trump, Scholnick said he would not expect the “energy landscape to be radically altered in the near term” by a Biden presidency. ”But, long term,” he said, “there would be more focus on ESG [environmental, social and governance] considerations and a secular shift away from fossil fuels to cleaner energy.” 

As to how a Biden presidency and a Democratic majority of the Senate would affect health care stocks, Gordon said that would inevitably result in downward pressure on drug prices and the expansion of health insurance coverage. 

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