Data & Research May 12, 2008

Most Americans Do Not Expect Comfortable Retirement

The percentage of Americans who say they will be able to live comfortably in retirement fell to 46% from 53% a year ago, a Gallup poll found.
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“Not having enough money for retirement” was the number one consumer worry as ranked in Gallup’s most recent economy and personal finance survey.

Sixty-three percent of Americans polled said they were very or moderately worried about not having enough money for retirement, followed by 56% who had the same level of worry that they would not be able to pay medical costs associated with a serious illness or accident, and 55% who are worried they will not be able to maintain their current standard of living.

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Retirement Income

Gallup also found the forces in the economy have led to a change in ideas about where Americans will receive retirement income.

One in five future retirees expect to use part-time work as a major source of their retirement funding, which is double the 10% who had the same expectation in April 2001, said the write-up of the results.

Fifty-four percent of those who have yet to retire said they expect their 401(k), IRA, Keogh, or other retirement savings accounts to be a major source of income in retirement, which was up to two points since last year.

Social Security was the second most cited expected source of retirement income (31% of respondents), which was an increase from 27% a year ago.

Meanwhile, the percentage of those looking to a work-sponsored pension plan as a major source of retirement income fell from 31% last year to 26% this year. The percentage looking to the equity in their homes for retirement income is down from 30% to 26%.

Only 17% of future retirees indicated they expect individual stocks or mutual funds to be a major source of their retirement income, down by nearly one-third from the 24% who thought these investments would be a major source for them a year ago, Gallup said. Also, the percentage expecting their regular savings accounts or CDs to fill this role dropped from 23% to 17%.

Gallup conducted telephone interviews with 1,021 adults, aged 18 and older last month. The results can be viewed here.

Data & Research May 12, 2008

Most 401(k) Participants Make Savings Mistakes

A report found that 69% of participants have 401(k) portfolios with inappropriate risk and/or diversification.
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The Financial Engines National 401(k) Evaluation report assessed nearly one million 401(k) participant portfolios to determine how well Americans are handling their 401(k) plans.

The report found 33% of participants fail to contribute enough to receive the full company match. The report also says participants with lower salaries, lower plan balances, and closer to retirement tend to make the most costly mistakes.

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Holding too much company stock in a portfolio can be damaging to retirement wealth, the report suggests.

Portfolios with more than 20% in company stock can expect an average of 18% less projected retirement wealth after 20 years, compared with those holding less than 10% in company stock. Portfolios holding 80% or more company stock can expect an average of 42% less projected retirement wealth after 20 years than those holding less than 20% in company stock (given the same starting balance and assuming no future contributions).

The report found that, in general, the older the participant, the more company stock he is likely to hold. Forty-three percent of those over age 60 hold more than 20% of their 401(k) portfolios in company stock, compared with only 28% of those under age 30.

Financial Engines said extreme company stock concentrations follow a similar trend, with 25% of participants over age 60 holding portfolios with 50% or more invested in company stock, compared with just 13% of those under age 30. Fifteen percent of participants over age 60 hold 80% or more of their portfolios in company stock.

Investing Mistakes

The report found participants earning the lowest salaries are the most likely to make investing mistakes. More than half (53%) of participants with annual salaries below $25,000 have portfolios with very inappropriate risk and/or diversification, compared with 33% of those earning more than $100,000 per year. The inappropriate risk or diversification includes high money market or stable value concentrations, age-inappropriate portfolios, or concentrations in a single asset class.

According to the evaluation report, portfolios with very inappropriate risk and diversification could expect to have 22% less projected retirement wealth after 20 years than those with appropriate risk and diversification.

Under Saving

One-third of active participants fail to save enough to receive the full company match, Financial Engines found.

Sixty percent save enough to receive the full employer match but are saving below the IRS or plan limits, and only 7% of all active participants save enough to come within $500 of the IRS or plan maximum allowed.

Younger participants and those with lower salaries or lower account balances tend to save the least. Nearly half (48%) of those under age 30 are failing to save enough to receive the full employer match, compared with 35% of those in their 30s, 31% of those in their 40s, 26% of those in their 50s, and 28% of those over age 60.

Almost two-thirds (63%) of those earning less than $25,000 per year fail to save enough to receive the full employer match, compared to 24% of those with salaries between $50,000 and $75,000 and 12% of those with salaries greater than $100,000 per year.

The Financial Engines National 401(k) Evaluation looked at 964,118 401(k) portfolios from 82 mostly large plan sponsors across five 401(k) providers, and rated each portfolio in terms of risk and diversification, company stock, and participant contributions.

The report can be downloaded by visiting www.financialengines.com.

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