Global Retirement Rules of Thumb for International Employers

Workers in Germany face a similar savings challenge as U.S. workers, according to Fidelity; while workers in the U.K. have an easier outlook, greater longevity means those in Hong Kong may need to save 20% of salary per year.

Just like in the United States, workers around the globe are being asked to assume greater responsibility for their retirement savings.

To recognize this trend, Fidelity has introduced a set of international retirement savings guidelines to help multinational companies and their employees. The first set of guidelines is tailored to help international employers identify the unique financial hurdles faced by workers in the U.K., Germany, Japan, Hong Kong and Canada.

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Jeanne Thompson, senior vice president and head of workplace solutions thought leadership for Fidelity, tells PLANADVISER the new guidelines should offer a practical framework to help global employers begin to understand how much money different workers need to save for a stable retirement. And even for U.S.-only employers, the guidelines will help demonstrate how assumed difference in longevity, access to private/public pension funds and various other factors impact a given working population’s retirement prospects.

“These guidelines can be part of an innovative international benefits program and can help employers monitor and encourage good retirement savings habits in a consistent manner across their regional workforces,” Thompson says. “The global retirement savings guidelines, which leverage a U.S. framework also known as ‘10X’ or age-based savings guidelines, are based on two metrics every worker knows—their age and salary.”

This provides workers and employers with a straightforward approach to understanding how much they should have in savings, as a multiple of their salary at specific age milestones. The projections become even more helpful when combined with locally relevant financial and demographic assumptions.

How much to save across geographies

As Thompson explains, Fidelity’s global retirement savings guidelines are based on several key assumptions and calculate a suggested annual savings rate and age-based savings milestones for each country. The guidelines also include a target income replacement rate and a “probable sustainable withdrawal rate,” which helps workers understand how much they will be able to withdraw from their savings each year without running out of money in retirement. 

In the United Kingdom, the guidelines for workers are to save a total 13% of their annual salary each year and aim to have saved seven-times their salary by retirement.

“This will put them on track to replace 35% of their pre-retirement income, which we estimate, when combined with their government pension, may enable them to maintain a pre-retirement lifestyle throughout retirement,” Thompson says, noting that Fidelity’s guidelines for U.K. workers are based on a 5% sustainable withdrawal rate in retirement.

Fidelity finds certain savings guidelines for workers in Germany are similar to those for U.S. workers. Notably, workers in Germany are encouraged to aim to have saved 10-times their final salary upon retirement, which will replace 45% of their pre-retirement income.

“The 4.6% withdrawal rate is consistent with the 4.5% withdrawal rate for U.S. workers,” Thompson says. “However, German workers are encouraged to save 21% of their salary each year.”

Facing an even more challenging savings picture, workers in Hong Kong are encouraged to save 12-times their final salary and have a suggested savings rate of 20%, which will put them on track to replace nearly half (48%) of their pre-retirement income. According to Fidelity, Hong Kong workers’ 4.1% sustainable withdrawal rate is the second lowest, only higher than Japan’s.

“The savings milestones are higher than the U.S. guidelines for several reasons, including the assumed retirement age in Hong Kong is earlier, the expected lifespan is longer and the assumed investment returns are on the lower end of the spectrum,” Thompson says.

Workers in Japan have a suggested savings rate of 16% of their annual salary, which is similar to the savings rate for U.S. workers, but Japanese workers are estimated to only need to aim to save seven-times their ending salary and replace 36% of their pre-retirement income. Workers in Japan have the lowest probable sustainable withdrawal rate (3.9%) due to the lowest expected long-term investment returns among the regions.

In Canada, the retirement savings rate for workers is only slightly higher than the rate for their counterparts in the U.S. The suggested savings rate for Canadian workers is 16% and with a target of saving 10-times their final salary, which will replace nearly half (45%) of their pre-retirement income. The suggested withdrawal rate of 4.5% is in line with the U.S.

Interpreting the findings for U.S. employers

The guidelines show broadly how having an employer based pension plan reduces the amount a person has to save, as well as the “X factor” at retirement, as they would be receiving income from their pension, so would therefore have to save less.

According to Fidelity, for every 1% of projected retirement income replacement from a pension, the required personal income replacement rate naturally declines by 1%, which has the effect of lowering savings rates and savings milestones. For example, in Germany where the state/government pension is estimated to replace approximately 41% of pre-retirement income and the suggested personal income replacement rate is 45%, Fidelity suggests a 21% savings rate and a savings milestone of 10-times.

However if the person had 10% of their retirement income coming from a pension plan, they could reduce the savings rate from 21% to 16% and X factor would drop from 10-times to seven-times. By the same token, if a person expects 20% of their retirement income to come from a pension plan, they could reduce the savings rate from 21% to 12% and X factor would drop from 10-times to 5-times.

Wells Fargo’s Annual Retirement Study Portrays an Industry in Transition

Executives overseeing the survey report agreed that the U.S. is just beginning to see the real impact of decades of public policy decisions and private employer efforts to fundamentally reshape the retirement landscape.  

Wells Fargo Institutional Retirement and Trust has published its ninth annual Retirement Study, finding once again that employees are being asked to shoulder more responsibility for directing their own retirement savings effort.

Lori Lucas, president and CEO of the Employee Benefit Research Institute, helped Wells Fargo leaders Joe Ready, head of Wells Fargo Institutional Retirement and Trust; and Fredrik Axsater, executive vice president and head of strategic business segments for Wells Fargo Asset Management, contextualize the findings. She added insight from EBRI’s own independent research, which harmonizes with many of the finding established by Wells Fargo’s analysis.

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According to Ready and Axsater, probably the most important overall finding in this year’s analysis is the strong positive impact on participant outcomes associated with having “a planning mindset.” This is to say that Wells Fargo uncovered four specific participant characteristics that correlate with a significantly better financial life—including lower levels of reported financial stress and greater reported financial outcomes. These characteristics include having set a specific money-related goal in the preceding six months; having previously set a specific long-term financial goal, such as a retirement age or savings level; feeling good about planning financial matters in general over the next one or two years; and preferring to save for retirement now rather than waiting until later.

“Employees just starting out in the workforce today face a retirement savings and spending journey of 60 to 70 years, and they are being made responsible for managing more of this effort on an individual basis,” Ready said. “Those closer to retirement still have a savings and investing horizon that is 25 or 30 years, or longer. Regardless of income, establishing a financial plan today and maintaining a focused set of financial goals can deliver many benefits.”  

Ready and Axsater observed how the planning mindset cuts across household income levels, with some evidence to suggest those with higher incomes are somewhat likelier to have a planning mindset. In particular, Wells Fargo finds 33% of workers with a planning mindset have household incomes below $75,000.

Across all workers surveyed, 84% of those with a planning mindset say they regularly contribute to retirement savings, versus 66% who do not report having this mindset. At the same time, fewer people with the planning mindset envision living to age 85 or longer as being likely to cause financial hardship.

Spending down of DC assets remains a big challenge

Ready and Axsater pointed to various findings showing employees are eager to receive more guidance and support when it comes to spending down DC plan assets.

Lucas here offered insight from EBRI’s research efforts, including a recent Issue Brief, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?

As Lucas explained, the data shows retirees are actually not spending down their accumulated assets to fund their retirement needs—even when assets are plentiful or when there is guaranteed income available to ensure that retirees will not run out of money. EBRI’s analysis found that regardless of pre-retirement asset size, rates of decumulation are low. Over an 18-year period following retirement, median assets declined only 24% for the low asset group of retirees—from $31,740 immediately after retirement to $24,000 eighteen years later. Lucas said this is was surprising to learn, but also somewhat intuitive.

“It is not ‘irrational’ for lower-asset households to hold on to their assets as long as possible,” she said.

EBRI found similar patterns when assets are greater. For the moderate asset group, median non-housing assets declined 27% (from $333,940 immediately after retirement to $243,070 18 years later). For those with the most substantial assets—starting with a median of $857,450 immediately after retirement, the decumulation rate was less than 11% (to $763,900 18 years later).

Lucas pointed out how having guaranteed income for life, such as a pension, didn’t make retirees more likely to spend down their assets. The study found that of all the subgroups studied, pensioners had the lowest asset spend-down rates.

“This suggests that if the goal is to avoid spending down assets, pensioners are best suited to achieve it. In other words, if retirees seek to limit their spending to their regular flow of income, such as pension, Social Security income, or other annuity income, then pensioners are indeed best suited to avoid asset decumulation, as they have more regular income than others,” EBRI found.

Asked for her personal take on this situation, Lucas said it also shows that retirees, unlike on the accumulation side of things, lack a framework for guiding their retirement spending decisions. And so, many of them revert to cautious attitudes, “and there is the fact that saving and frugality are generally considered to be virtuous behavior.”

“I would also point out that most individuals say they are happy in retirement and do not need to spend a lot to be happy,” Lucas said. “They say that having their nest egg intact, as a form of independence and security, makes them happier than anything material or discretionary they may be able to buy with the money.”

Additional findings

Ready and Axsater observed that users of 401(k)s do not see them as strictly a means for accumulating lump-sum savings. Eighty-six percent of workers agree that it would be valuable if their plan provided a statement on how much they could spend each month in retirement, based on their current and projected savings.

According to the survey, younger workers would like to see their employer provide more help with their long-term retirement planning choices. Seventy-three percent of Millennial workers and 63% of Generation X workers say they would like more help from employers, compared with 50% of Baby Boomers.

In closing the presentation, the trio of speakers voiced optimism about the prospects for continued progress on solving retirement issues here in the U.S.—both from a public policy and private industry perspective. Ready said providers and plan sponsors can be proud of the fact that employees generally perceive their retirement plan offerings as being high quality and as having a strong positive impact on their financial lives. As the survey shows, 92% of workers say they feel more secure about retirement because they have contributed to a 401(k), and 82% of those with access to a 401(k) say they would not have saved as much for retirement at this stage if not for the 401(k).

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