What is preventing you from retirement planning?

Over two years ago three actuarial associations (the American Academy of Actuaries, Australian Actuaries Institute, and the Institute and Faculty of Actuaries in the United Kingdom) determined that the trend away from defined benefit pensions and toward defined contribution plans was going to be a major problem.  In 2017 they released a follow-up study that shows the extent of the problem

All three countries have made efforts recently to improve retirement policies; however, the survey would suggest that progress to date in changing expectations and preparations has been modest at best.

In all three countries, inertia and procrastination—broadly characteristic of most people’s decision-making—seem to lead to similar results across all three countries.

People in the United States, United Kingdom and Australia are struggling to prepare for retirement because of increasing demands on them to manage their own risks. This inability to manage the risk of planning for retirement has resulted in many planning not to retire at all, most planning to retire gradually rather than fully, many planning to retire at older ages, and relatively few expecting a comfortable lifestyle in retirement

This could be seen as an adaptation to the risk transfers associated with movement from defined benefit to defined contribution plan coverage.

When asked what they would do if the value of their assets decreased people said they were prepared to save more, acquire more information, and if that fails they plan to return to work. The Actuaries think that a return to work is unrealistic if age or health prevent such a return when needed

When asked about retirement many did not know how much they will need when they retire, how long their money will last. People were also not prepared or had even thought about the risks associated with longevity, chronic ill health, or being forced to stop work unexpectedly early.

From the survey the Actuaries found that the relatively low percentages of middle-aged (for purposes of this survey, ages 34-54) and middle-income (for purposes of this survey, above the bottom 40% and below the top 20%) respondents in all three countries who are prepared to retire or for the risks of retirement were particularly noteworthy.

How can these countries prepare people to understand retirement from a policy position? According to the Actuaries there are a three-prong approach is needed

1.    Financial education: The results clearly indicate a need for more education related to financial literacy and retirement planning. While the results suggest a broad need, the results also suggest the possibility of particularly targeted (and potentially differently designed) educational approaches based on age, gender, and income in all three countries. The education required should aim to establish a comprehensive understanding of the relationships linking accumulated retirement funds, a retirement-age goal, and the risks associated with making retirement assets last a lifetime. Given the widespread lack of knowledge of the level of assets that will be accumulated at retirement and the similar lack of knowledge of how long savings will last in retirement, development of robust and accessible projection tools might serve an important purpose in financial education.

2.    Default options: The results clearly indicate widespread lack of preparation, even when information is sought and some savings are reported. Understanding and managing retirement risks can be extremely complex, and adequate preparation may challenge the ability of many, regardless of the amount of education provided. Incorporating default enrollment into private plans, and making the defaults as appropriate as possible to the situation of the broad majority, would help compensate for the limited attention that most people give to planning for the future. Limited preparation for longevity risk amplifies the need to consider default options that emphasize lifetime income rather than lump-sum distributions during retirement. The very low preparation rates among the youngest respondents, while not surprising, suggest the importance of automatic enrollment in retirement savings programs at the earliest stages of people’s working lives.

3.    Public pension adequacy and sustainability: While public pensions (the Age Pension in Australia, the State Pension in the United Kingdom, and Social Security in the United States) are generally not designed to be the sole source of retirement income, they are certainly an essential part of the retirement package for a majority of citizens. Making sure that those pensions are sustainable and capable of providing adequate retirement income, at least for those who depend on it most, remains of continuing importance. That large percentage of the population at younger and middle ages do not cite government as a source of retirement income may reflect concerns about the sustainability of these programs.

The survey was published Thursday October 12 by the American Academy of Actuaries, the Institute and Faculty of Actuaries and the Actuaries Institute of Australia. For the full survey go here (pdf file)