Specifically, households that overestimated economic recovery fell into the not worried enough bucket. They also found that households with two incomes but only one saving were often off track and unaware of their retirement needs.
The Center for Retirement Research’s new report[1] presents quite a fascinating find: 40% of American households are either too worried or aren’t worried enough about whether they are on track for retirement. And the shocking part is, those with higher incomes may be falling into the “not worried enough category.”
The good news is most that investors have a strong idea of whether they are on track for retirement. According to the CRR, 40% of American households are doing well and aware of it that. Another 20% are struggling, but also are aware of that. That means the rest, roughly 40%, are either not on track and don’t know it or are doing well but are worrying anyway. Financial advisors can help the later set, those who are too worried, in a variety of ways already at their disposal. That might include customizing information for those worried folks so that they can perceive their progress more easily. But what about the ones who are singing away the summer and leaving them unready for the winter, like the fabled grasshopper?
What’s alarming about the new CRR report, which focused on the National Retirement Risk Index, is who is struggling and not knowing it. It’s those with higher incomes who may be in need of a lot more client education than they perceive they need. This is particularly troubling, because the report also found that “while this group is in the most danger of saving too little, even those who do recognize they are in trouble may not act unless prodded.” That means tools for both awareness and action may be needed.
To determine if a household was on track for retirement saving, the CRR used a Federal Reserve survey based on replacement rate. It defined those who couldn’t come within 10% of their replacement rate as “at risk.” There are certainly critiques to this approach. One critique may be that it fails to capture relocation. For example, a couple earning $300,000 in the Washington, D.C. metro area would only need to earn $195,050 in the Charleston, S.C. metro area, a change of 35%. That couple most likely is not at risk and may project a sense that they are on track though the index would classify them as “at risk.” Relocation is a common plan for many considering retirement. According to the Motley Fool, roughly 40% of Americans in 2023 stated they planned to relocate for retirement.[2] However, the CRR’s study may have found common attitudes and attributes that explain the readiness gap.
The CRR study looked at the basis for the beliefs in why some thought they were better positioned. It found that inaccurate risk assessment seemed to be the cause driving the lack of concern for in many who were not worried enough. Specifically, households that overestimated economic recovery fell into the not worried enough bucket. They also found that households with two incomes but only one saving were often off track and unaware of their retirement needs. The CRR posited that this could be because the dual income single saver households hadn’t considered the second spouse’s income or were unaware of how much Social Security would be able to replace their income. The CRR also noted that there were some racial disparities in perception of preparedness, possibly due to lack of access to financial literacy resources.
In light of this new research, advisors may want to check in with their clients about whether those clients have the appropriate picture of their retirement readiness. When those clients fall short of accurate perception, advisors may want to consider educational tools. They may also want to drill down to the specifics of what those clients have misperceived. For example, some clients may not understand the range of what health costs will be in their retirement or Medicare limitations. Others may not understand appropriate longevity predictions. Others may have a faulty understanding of the sources of retirement income, and may be including inheritance, social security or part-time work. For more educational tools, see our Advisor Edge page here: https://www.bcgbenefits.com/advisoredge
[2] https://www.fool.com/retirement/2023/02/20/40-of-workers-plan-to-relocate-in-retirement-shoul
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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