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401(k) Tax Changes Would Slash Retirement Savings: Wells Fargo Survey

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While the House and Senate tax bills were taking shape, lawmakers floated some changes to 401(k) contributions. A survey conducted around that time shows just how deeply those changes would have affected savers.

Three-quarters of nonretired investors in a new Wells Fargo/Gallup poll had a 401(k) plan, and a third cited tax deferral on the money they contribute as their plan’s most valued feature.

And what if their plan’s tax-deferred status were eliminated? Forty-six percent of respondents said they would save less or just stop saving, and 42% would save about the same amount.

The telephone survey was conducted in early November with 1,015 U.S. adult investors, 67% of whom were nonretired and 33% of whom were retired.

“The 401(k) plan has evolved into the greatest savings and investment vehicle that Americans have today to steadily build a retirement nest egg,” Fredrik Axsater, head of strategic business segments at Wells Fargo Asset Management, said in a statement.

“Pretax savings has a direct impact on the level of savings that people achieve, and we have to recognize this as the country contemplates changes in tax policy. The employer-sponsored 401(k) is critical to allowing working people to save and invest over time.”

In late October, rumors swirled that lawmakers debating tax reform were mulling a cap on 401(k) contributions at $2,400 per year. In a tweet, President Donald Trump quickly promised “NO change” to the accounts.

In mid-November, a senator proposed requiring that all catch-up contributions get Roth treatment, a plan that opponents called “mini-Rothification.” Neither provision made it into the tax bills.

Wells Fargo/Gallup’s fourth-quarter Investor and Retirement Optimism Index came in at +140, up from +138 in the third quarter and close to its September 2000 high of +147.

The index is an enhanced version of Gallup’s Index of Investor Optimism, which provides the historical trend data.

According to the poll, 72% of investors said they were somewhat or very optimistic that they would be able to achieve their investment goals over the next five years, up from 52% of investors during the same quarter five years ago.

Investor optimism generally tracks with market gains, as the S&P has gained nearly 100% since the fourth quarter of 2012, Wells Fargo noted.

Guaranteed Retirement Income Stream

Almost all nonretired investors in the survey strongly or somewhat agreed that it was important to have a guaranteed income stream in retirement, in addition to Social Security. Yet confusion exists about how to get this additional income stream.

Sixty-one percent strongly or somewhat agreed that they wanted a guaranteed monthly income stream that lasts as long as they need it, even if that meant giving up access to some of their money.

At the same time, 75% of nonretired investors either strongly or somewhat agreed that they wanted to be able to spend their money as they wished in retirement, even if that meant they might run out of money too soon.

Nearly half of investors also were unsure about what products were available to provide them with a guaranteed income throughout retirement.

(Related: ‘Stan the Annuity Man’ Is Livid About Fixed Indexed Annuities)

Just over half of poll respondents said they had a savings number in mind for retirement; the rest did not. Those with a specific number said $1 million (median) was the right objective, while 29% said $500,000 or less.

Four in 10 nonretired investors not only had a specific savings number in mind, but could also estimate the income that sum would generate annually in retirement. Unfortunately, many of these estimates were unrealistic, Wells Fargo said.

According to the survey, 19% of nonretired investors had a savings goal and a somewhat realistic assumption of withdrawing 1% to 5% of their savings every year throughout retirement. The rest were unsure what their annual drawdown would be, or they estimated a number that amounted to more than a 5% annual withdrawal rate.

As perspective, Wells Fargo Asset Management estimated that even with a 5% inflation-adjusted annual distribution, there was a 20%–30% risk of running out of money in retirement, assuming a well-diversified investment portfolio.

The data also showed that investors who said they needed to save $1 million or more for retirement expected to draw 5% per year, on average, while those who said they needed to save less than $1 million expected to draw an average of 7% per year.

“Setting a retirement savings goal — even if it’s an estimate — is a critical step in the process of managing one’s retirement outcome, but it’s hard to do,” Axsater said.

He said it becomes even harder to try to estimate what an investor will harvest from savings each year of living in retirement. “This is where our industry must come up with solutions that allow people to envision their savings needs and what that translates to in terms of annual drawdown in retirement,” he said.

Social Impact Investing and Diversification

The survey asked investors about their views on choosing investments based on the effect they have on things like the environment, human rights, diversity and other social values, in addition to investment returns.

Thirty-nine percent of female investors said they were very or somewhat interested in investing in social impact investments, compared with 26% of male investors. A similar breakdown showed up between under-50 investors (more interested) and those older than 50.

Wells Fargo said this finding was encouraging news for employers who want to offer social impact investments to employees as part of their 401(k) portfolio options.

Forty-four percent of nonretired investors with a 401(k) said they would definitely or probably put money in social impact investments if they had the option in their plan.

In addition, 34% of nonretirees with a 401(k) said including social impact investments as an option in a workplace retirement plan would make them feel more positive toward their employer. Of these, 53% were women and 47% men.

Only 6% of investors said they would harbor negative feelings toward their employer if these investments were offered.

Although only a tenth of investors said they currently had money in social impact investments, a third said they were at least somewhat interested in the products.

Investors in the survey were unclear about the performance of social impact funds compared with the market as a whole — 37% said they performed the same as the market average, 33% said they performed worse, 28% were unsure and just 2% said they performed better. More men than women said social impact investments would underperform the market average.

Recent research found that impact investing was showing tidy profits.

Asked to rate their interest in each of three specific social impact themes, respondents said they were very or somewhat interested in:

  • Protecting the environment, 78%
  • Doing social good, such as promoting diversity and improving education, 76%
  • Focusing on responsible corporate governance, 74%

When asked their views on the riskiness of investing internationally, 57% of investors said making international investments was a little or a lot riskier than U.S. investments.

A quarter considered international investing as equal in risk to domestic investments, and a tenth said it was a little or a lot safer than domestic investments.

Investors who viewed international investing as “riskier” than domestic investing tended to be older: 64% of those 50 and older versus 48% of those 18 to 49. Fifty-three percent of investors who considered investing abroad riskier cited potential for political instability in foreign countries.

“The perception that international investing poses a higher risk is interesting, and it seems to be age-related,” Axsater said. “Political risk exists in foreign countries, as well as the U.S., presenting a strong case for all investors to have a well-diversified, global portfolio.”

According to the Wells Fargo Investment Institute outlook for 2018, some international equity markets look more attractive than domestic markets because the U.S. market is later in its growth cycle compared with international economies and markets.

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