Retirement Savers Value Formal Written Plans

Most pre-retirees and retirees surveyed said they would not have been as financially successful without a formal written retirement plan.

A new LIMRA Secure Retirement Institute study finds that pre-retirees and retirees (ages 55 to 75 with financial assets of $100,000 or more) who have a formal written retirement plan are more likely to feel more confident they are saving enough for retirement and more than twice as likely to feel very prepared for retirement than those without one.

The study, The Benefits of Retirement Planning, found three-quarters of pre-retirees and retirees have some kind of financial retirement plan, but only 16% have a formal written retirement plan.

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Half of pre-retirees and retirees who have a formal written plan say they feel very prepared for retirement, compared with just 17% of those without one. Eighty percent of those with a formal written plan have estimated how many years their assets will last into retirement—nearly double those who don’t have a formal written plan (42%).

More than three-quarters (78%) of pre-retirees and retirees who have a formal written plan have developed a specific plan for generating income from savings; only 38% of those without a formal written plan have done so.

NEXT: Converting to guaranteed income

“Strikingly, most of pre-retirees and retirees we interviewed said they would not have been as financially successful without a formal written retirement plan, acknowledging their own lack of awareness and skill,” notes Matthew Drinkwater, PhD., assistant vice president, LIMRA Secure Retirement Institute. “Even the wealthier consumers said they found value in a formal plan—if only to review and vet their own ideas.”

The Institute found that pre-retirees and retirees who have formal written retirement plans are more likely to roll over and consolidate their assets within two years.  They are also more likely to convert a portion of their assets into an annuity within two years.

Pre-retirees with formal written plans are twice as likely to convert a portion of their assets into guaranteed income (22% vs. 11%). Retirees with formal written plans are three times as likely to convert a portion of their assets into guaranteed income (25% vs. 8%).

“Our research demonstrated that taking the time to create a formal written retirement plan—which involves a comprehensive discussion about goals, asset management and risk mitigation—often leads to better outcomes in retirement,” says Drinkwater.

Student Loans Put Retirement at Risk

Any discussion about improving lifelong financial security should include discussions about managing student loan debt, researchers conclude.

Student loan debt was $1.2 trillion in 2015, compared to $.2 trillion in 2003, notes an Issue Brief from the Center for Retirement Research at Boston College. 

It now accounts for more than 30% of total household non-mortgage debt, having surpassed credit card debt in 2011. Fifty-five percent of households ages 21 to 29 in 2013 had student debt, with an average amount of $31,000.

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The researchers found that starting out $31,000 in the hole could have a big impact on households’ retirement preparedness. 

The National Retirement Risk Index (NRRI), which is based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households, shows that as of 2013, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), 51.6% were at risk. Sixty percent of households with student debt are at risk compared with 49.2% of those without this debt. In addition, those with student loans who have completed college have a slightly higher percentage of risk than those without student debt (52.9% versus 49.2%), but for households with student loans that did not complete college, the difference is 67.1% versus 49.2%.   

The researchers recalculated the NRRI by giving today’s working-age households the same level of student debt as those recently leaving college, and found that an additional 4.6% of households would be at risk of having inadequate income in retirement—from 51.6% to 56.2%. 

The researchers conclude that college costs should be included in broader policy discussions about how to improve lifelong financial security.

The Issue Brief may be downloaded from here.

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