Too Little Risk Is a Dangerous Move for Retirement Savers

Many Americans may be investing too conservatively to meet their retirement goals, according to the 2016 Wells Fargo Retirement Study.

The annual study is put together by Harris Poll and includes the responses of more than 1,000 workers and 250 current retirees. Talking through the results with PLANADVISER, Joe Ready, executive vice president and director of Wells Fargo Institutional Retirement and Trust, said he is always a bit puzzled by the subset of investors who choose to get involved in the markets, but who go with very low-return potential investments to protect themselves from anticipated downside risk.  

“Almost six in 10 investors tell us they focus more on avoiding loss than maximizing the growth of their investments for retirement,” Ready said. “Interestingly, this does not vary much across ages: 59% of 30-somethings, 62% of 40-somethings, 58% of 50-somethings, and 52% of those 60+ agree with that approach.”

For illustrative purposes, the research report considers what $10,000 invested in two different ways 40 years ago might look like today. Using historical data, one can see that a portfolio allocation of 70% stocks and 30% bonds would have grown to as much as $581,295 from January 1, 1976 through September 30, 2016. For the same time period, $10,000 invested in 30% stocks and 70% bonds would have grown to $336,715, according to the Wells Fargo analysis.

“This simple example makes it clear that choosing the right mix of investments relative to your time horizon and risk tolerance is of critical importance when it comes to being well-prepared for retirement,” Ready said. “In addition to saving enough, two key actions that can help position a person for success in retirement savings are to start early and make sure you’re allocated according to an investment plan aligned with your goals, avoiding emotional reactions to market news and making intentional, informed decisions about investments in your retirement planning.”

Ready was quick to stress that taking more risk does not mean being reckless.

NEXT: Workers need help with investing 

“It’s important that people are allocating their investments in a way that’s appropriate for their age and risk tolerance,” he added. “When you combine consistent saving and an age- and risk-based investment strategy, that’s the sweet spot we want people to achieve so they are in a better position for retirement. In the survey, we heard from many looking for help to get to that sweet spot, acknowledging it was a challenge to get all the pieces to come together by the time they wanted to retire.”

Although the study findings demonstrate the positive impact 401(k)-type plans have on retirement savings for workers with access to them, 58% who have a 401(k) plan available would still like more help with their plan to make sure they’re making the best investment choices for their retirement.

“Starting the savings journey too late is a big factor, and it’s a problem we see across all age groups to some extent,” Ready explained. “Seventy-four percent of those in the workforce agree they should have started saving more for retirement earlier than they did. It is worth noting that this attitude is highest for 30-somethings, 79% of whom agree they should have started saving earlier. Even a majority of retirees [68%] feel this way.”

When examining the average age at which people started saving, the picture does look to be improving,  Ready noted. Thirty-somethings started saving at age 26, 40-somethings at age 29, 50-somethings at 32, and those age 60 and up at 36. One in 10 of all ages say they have not started saving for retirement.

“The fact that the 30-somethings are agreeing they should have started saving earlier—more so than the older cohorts—and that they actually started saving earlier than any other age group in this survey says to me that they really understand the importance of starting early and taking advantage of their biggest asset: the power of time,” Ready said.

When asked about what components made up a retirement plan—and what they valued in employer-provided retirement benefits—workers had varying answers, especially if they were or were not already saving consistently. For example, the majority of those who have not been consistent savers have not thought about how long their savings would last, how much could be withdrawn on a monthly basis in retirement, or how to invest their savings during the draw-down phase in retirement, the study shows.

NEXT: 401(k)s make a big difference in employees’ lives 

According to Wells Fargo, this year’s study continues the trend of analyzing the impact of having access to a 401(k)-type plan.

The differences in amounts saved among those with access to a 401(k)-type plan compared to those without access to such a plan are stark. It’s about $87,000 median saved for retirement vs. $10,000 for those without access. Accumulation goals also differ, according to the Wells Fargo research. These respective groups estimate needing a median of $750,000 vs. $500,000 for retirement.

“The 401(k) plan may help people think more about what they need, but the most glaring difference to me lies in how much people with access have saved for retirement, comparatively,” Ready said. “We found that middle-income folks with less than $75,000 in household income with a 401(k) plan could have saved double or even up to 30-times more than their peers without a retirement plan at work, depending on the assumptions. That suggests the power of automated, systematic saving and investing for retirement through payroll-deductions works. The next conversation is about expansion, how this can be available to more workers.”

Ready concluded by highlighting the fact that survey respondents would like national leaders to consider retirement issues as a top priority, with 63% of workers and 73% of retirees agreeing that the incoming president needs to define a retirement policy for everyday Americans.

Other attitudes revealed about 401(k) plans include the following:

• A majority of workers (57%) have a 401(k) plan or equivalent available from their current employer, with 41% on their own to proactively contribute to retirement savings plans outside of work.
• Seventy-three percent of workers indicate they wouldn’t have saved as much for retirement if they didn’t have a 401(k) plan or would have saved more for retirement if they had a 401(k) plan. Most (71%) retirees feel the same way.
• Seventy percent of workers who have consistently saved for retirement since the start of their careers have access to a 401(k)-type plan.
• Among workers who do not have access to a 401(k) plan, two thirds (66%) believe they would save for retirement if they had access to a 401(k). This attitude is most prevalent among workers in their 30s, with 79% agreeing.
• A majority (64%) of all workers are in favor of requiring all employers to provide a retirement plan for all employees.
• Fifty-eight percent of workers agree that employers offering matching contributions should allow their employees to apply part or all of a company match to student loan debt. Among workers in their 30s, 69% agree.
• Following a job change or retirement, nearly six in 10 (58%) workers who are contributing to a 401(k) plan would move their funds into an IRA, another 401(k) plan, or cash out. Twelve percent remain unsure of what action they would take. Twenty-eight percent would opt to leave it in the current plan, a choice that is higher (38%) for those in their 60s.