Americans are notoriously poor planners when it comes to retirement, although the recession has prompted some to get more serious about it.
The Employee Benefit Research Institute’s annual survey on retirement confidence, released earlier this year, found Americans expect to work longer to secure their retirement—28 percent say they have changed their target year for retirement in the past year. Large percentages of respondents also say they’ve reduced expenses, and changed the way they invest. Twenty-five percent are saving more money and an equal number are now seeking advice from financial professionals. And EBRI reports that among all workers, 75 percent say they have saved money for retirement, one of the highest levels ever measured by the RCS.
But there’s still plenty of work to do. A recent survey by the Certified Financial Planner Board of Standards, found that 64% of respondents do not have a written financial plan in place.
Some other indicators of retirement readiness:
• Only 56 percent of American workers are active participants in a DC plan. One major reason is access; there’s no law mandating that employers offer 401(k)s, and about 35 percent of workers don’t have access to a employer-sponsored plan. Choice is another factor; 15 percent of workers who have access to a 401(k) decline to participate. More than 70 percent of low-income households reach retirement age without any employer-sponsored retirement coverage.
• Employers are cutting back on matching contributions; in 2008 one-third of employers reduced or eliminated their matching contributions to retirement accounts, and another 29 percent planned to do so in 2009.
• Employees contribute, on average, 7.5 percent of their salaries, about half the rate recommended by most financial planning experts.
• Exposure to stocks is too great as retirement approaches. Nearly one in four investors approaching retirement age (56–65) had more than 90 percent of their account balances in equities at the end of 2007. That’s far too high, and older investors, suffered huge losses when the market crashed in 2008.
• Investors cash out prematurely. About 45 percent of plan participants cash out their 401(k) balances when they change jobs, rather than roll them over to new employers or IRAs. That disrupts the long-term growth of their assets. Borrowing and hardship withdrawals also are allowed under the rules, and people have been tapping into their balances somewhat more frequently during the economic crisis.
All these factors add up to woeful underperformance by the defined contribution system. In 2007—before the crash—the median amount saved by households headed up by a person in the pre-retirement years (54-65) was $50,500