Income Volatility a Challenging Factor in Retirement Planning

Those looking for a clear positive or negative indicator summing up the results of the Federal Reserve’s 2015 Survey of Household Economics and Decisionmaking are going to come away disappointed.

Fed officials see “reasons for optimism as well as concern about the financial wellbeing of individuals and their families.” On one hand, when looking at aggregate-level results for the population, there are signs of improvement across a number of dimensions, yet other indicators present a more worrying front. 

“On the vast majority of financial measures for which comparisons can be made between the three years of survey data, the most recent results indicate that individuals’ financial picture is similar to, or better than, it was in the two earlier years,” Fed officials explain. “Relative to the previous two surveys, more respondents are saving at least some of their income; a slightly larger fraction say that they would be able to cover a $400 expense without borrowing money or selling something; and more adults believe that they have the skills needed for the types of jobs that they want right now.”

Retirement industry professionals will know that averages can be quite deceiving, and as the Fed explains, there is mounting evidence that these improvements are not necessarily being experienced universally. Adding some interesting new color to recent research into the increasing burden presented by student debt, the Federal Reserve data suggests most of the financial improvements are reported by respondents who attended college—indicating that those with lower levels of education are still struggling.

Additionally, according to the Fed, “many respondents report that they experienced some level of volatility in their income and expenses, and among those with lower incomes, this volatility often results in difficulty paying monthly bills.” It’s no great leap to see how unanticipated income volatility, at all income levels, can wreak havoc on otherwise well-considered retirement planning strategies.

NEXT: It’s a tough job to save for retirement for many 

In addition to asking respondents about the retirement savings that they currently hold, the survey asked respondents about the sources of income that they plan to use to pay for expenses in retirement. There are significant differences by age in the sources of funds that respondents expect to use to pay for retirement expenses, and “this is especially apparent with respect to Social Security.” Forty-two percent of those under age 30 say that they anticipate that Social Security benefits will be part of their plan to pay for expenses in retirement. This percentage steadily increases by age cohort, with up to 91% of those age 60 or older expecting to receive Social Security income in retirement.

“It is unclear whether these differences simply highlight the fact that older adults are likely to be thinking more actively about Social Security or if they represent diminishing levels of confidence among younger people about the future availability of Social Security benefits,” Fed officials explain. “Similarly, traditional defined benefit pension plans are less common as an expected source of retirement funding among younger respondents.”

Highlighting the limits of the defined benefit system, just 36% of those age 60 and older “are counting on income from a defined benefit pension,” while 23% of those ages 18 to 29 plan on receiving income from a pension. “Just over half of respondents expect to draw on a 401(k) account in retirement, 44% of respondents plan to rely on savings they hold outside formal retirement accounts to cover their expenses, and 32% plan to use savings in an individual retirement account (IRA).”

Findings also show a sizable group of people, nearly one in five, expect to sell or rent land or real estate to pay for retirement expenses, and many non-retirees also expect continued employment to be a significant source of retirement income, with 38% of all respondents expecting to continue working in some capacity “post-retirement” to cover their expenses and 22% expecting their spouse or partner to continue working.

Concluding its report on the survey results, Fed officials say there is “little question that, on the whole, the financial well-being of Americans seems to have improved relative to the prior year and relative to the year before that.” However, groups of consumers still display elevated levels of financial stress and remain at risk for financial disruption in the case of further economic hardships.

The full results are reported here.