Retirement in the United States has been transitioning for some time from a defined benefit system to one that is largely supported by defined contribution plans. Other countries are in similar transitions, with some farther along than others, Vanguard noted in a report released in January.
At one end of the spectrum is Australia, where the compulsory superannuation system is mostly DC-oriented, Vanguard wrote in the report. On the other end is the U.K., which has recently started gravitating toward a DC-supported private system, though most pre-retirees and recent retirees will get the majority of their benefits through a DB plan, according to the report. The other countries included in the report, Canada and the U.S., are at different points in the middle of the spectrum.
Vanguard surveyed people between 55 and 75 years old who either had retired in the prior 10 years, or were planning to retire in the next 10 years. Respondents had a minimum $50,000 (in their respective currencies) of investable assets. The survey was conducted in October and November 2015 among more than 5,660 households.
The report found retirees tend to be more satisfied with their financial situation and more confident than pre-retirees, particularly in the U.K. Vanguard believes this is at least partly due to “the resolution of the psychological uncertainty that comes with navigating the transition to retirement.” Furthermore, pre-retirees were more likely to call their financial situation complex.
Retirees were more likely than pre-retirees to feel good about their budgeting and cash flow, with U.K. retirees again reporting the most comfortable situation. More than 40% of U.K. retirees said they could spend freely, compared with approximately a quarter in other countries.
About half of pre-retirees in the U.K., Australia and Canada, and nearly 60% of American retirees, said they believe their country is in a national retirement crisis. However, between 6% and 12% of pre-retirees said their own situation was looking so dire.
That me-versus-them gap is consistent across all four countries, which Vanguard believes reflects the “relative affluence” of the survey sample.
Sources of Income
In the U.S., U.K. and Canada, government pensions are the most common source of retirement income, with between 89% and 95% of pre-retirees saying some of their income will come from government benefits. Retirees’ responses were similar, with between 77% and 84% saying they received income from the government. Employer-sponsored pensions were less common, especially (and unsurprisingly) among pre-retirees.
Across all four countries, pre-retirees and retirees reported similar levels of dependence on personal savings and tax-advantaged accounts, from 75% of Australian respondents, to 88% of Canadian pre-retirees and British retirees.
DC plans were most prevalent in the United States and Australia, where 73% and 83% of pre-retirees in those respective countries said they would receive income from a defined contribution plan.
It’s important to note that between 36% and 46% of pre-retirees said salary and wages will constitute part of their retirement income, but less than 20% of retirees in any country said the same. Just 9% of British retirees and 10% of Australians said they still received a salary or wages as retirees. “Pre-retirees may feel they need more resources in retirement, and so expect to work,” Vanguard wrote. “It could also be true that recent retirees had the same idea, but then, upon retiring, realized that work was no longer necessary in retirement. Pre-retirees may also be overestimating their ability to find suitable work.”
Sources of Information and Planning Assistance
Almost 80% of U.S. respondents said they get financial planning help from a formal source like an advisor or workplace retirement plan, and most are relying on multiple sources. One in 10 respondents in the United States said they rely the government or on informal sources like friends and family to help them plan. Just 13% of pre-retirees and 14% of retirees said they’re taking on retirement planning completely on their own.
“Access to formal help, particularly multiple sources of formal help, increases with assets,” the report noted. “The proportion relying on informal help only or to not have any help at all is higher among those with lower assets.”
Cost was the main reason given for not using a financial advisor, but most respondents who don’t use a formal source of planning assistance just don’t feel like they need it. A third of pre-retirees said they didn’t turn to an advisor or the government for help with planning because they had other sources of support, compared with 36% who said the same of their employer plan and 41% of financial institutions.
The good news is trust wasn’t the biggest issue for respondents who didn’t look for formal retirement help (the bad news for advisors as that they were seen as less trustworthy than financial institutions, employer plans and the government).
Australian respondents were most likely to be skeptical of advisors, while in the U.S., the government was seen as the least trustworthy source of retirement help.
— Read Want a Flexible Retirement? Here’s How 10 Countries Stack Up on ThinkAdvisor.