Putnam Finds Discipline Can Matter as Much as Earnings

The survey used Putnam’s recently developed “Lifetime Income Score (LIS)” to analyze the results; it was designed to estimate the level of income that U.S. households are currently on track to replace in retirement.  The scores are given as a percentage of income that is expected to be replaced in retirement. In the survey of 3,290 working adults, ages 18 to 65, the median LIS was 64%, which includes Social Security.

Based on the survey findings, Putnam was able to debunk four commonly accepted ideas surrounding American’s level of retirement readiness. The first of which is that Americans are ill-prepared for retirement and have “utterly inadequate” savings, said Merl Baker of Brightwork Partners, which conducted the survey for Putnam.  At a press briefing to announce the findings, Baker said the median LIS score of 64% was quite encouraging, considering how little people are saving. He pointed out that about half of that 64% income replacement is due to Social Security.

This brought up another common misperception – Americans are on their own when it comes to saving for retirement; the government is out of the picture. This is not true, said Baker, “it is a partnership. Social Security accounts for about half of the Lifetime Income Score, especially for lower income households,” he added.

Perhaps the most “assumed” notion towards retirement readiness is that affluent Americans will have the easiest time achieving 100% income replacement during their retirement years. The survey found that this is not the case; households with high or low incomes can achieve an LIS of 100%. Putnam suggests that financial behavior plays a bigger role than what was previously accepted; this includes defined contribution plan participation, the use of an adviser, and a general propensity to save.

Putnam found that eligibility to participate in an employer-plan was the most important factor for achieving a high LIS, regardless of income. Those with access to a workplace-sponsored plan achieved scores that were nearly twice as high as those without access to a plan.  This is critical considering that 40% of employees in the private sector still do not have access to a defined contribution plan, a statistic Putnam cited from the U.S. Bureau of Labor.

The fourth misperception of retirement readiness Putnam addressed is that Americans are deluding themselves about their financial situation. Its survey found that those who are better prepared for retirement are confident whereas those who are not prepared are aware they are in bad shape.

Most prepared versus least prepared 

Putnam analyzed the characteristics of those who achieved the highest income replacement scores – some reaching 124% – versus the characteristics of those with the lowest scores – some on track to replace only 46% of their income in retirement. Those who are most prepared were contributing 10% or more to a defined contribution plan.  Even those who contribute 4%-10% achieve 84% replacement. Those who did not defer any of their income scored 58%. The least prepared Americans are households that are not eligible for an employer-sponsored plan. If Social Security is removed, their LIS plummets from 46% to 8%.

Using professional advice also boosted an LIS. Those with a paid adviser scored 82%, while those without an adviser scored 61%, regardless of income level.  And if Social Security is taken out of the equation, those with an adviser still manage to achieve 51% income replacement, and those without reach 23%.

At the press briefing, Putnam also unveiled its new Putnam Institute, a think-tank focusing on key issues in portfolio management and retirement, and financial planning education to financial advisers. The Putnam Institute’s first report discusses how equity allocation in a portfolio should be substantially less than where it currently stands – however, Dr. Van Harlow, Director of the Putnam Institute, pointed out that asset allocation plays a relatively small role in achieving a high LIS (see “Study Suggests Lifecycle Funds’ Equity Allocations too High”).

President and CEO of Putnam Investments, Bob Reynolds, concluded that a high savings rate and access to a defined contribution plan are the most critical factors to achieving a high level of income replacement in retirement, at any income level. He also said Washington D.C. needs to take the Social Security dilemma and make it solvent. “Social Security plus a high deferral rate is the vaccine against elderly poverty,” he said, adding that the industry needs to push out the message that a 10% deferral rate needs to become the new reality.