Wells Fargo/Gallup Investor and Retirement Optimism Index, February 2018 Source: Wells Fargo

Three in five American investors say they are optimistic about economic growth, stock market performance and unemployment over the next year, Wells Fargo reported Tuesday.

However, they are less positive about inflation, with only 40% at least somewhat optimistic and 34% at least somewhat pessimistic.

Investors are most positive about maintaining their household income over the 12 months and about reaching their five-year investing goals, with 71% saying they are at least somewhat optimistic about each.

“Over the course of this bull market since the recession, there have been periods of volatility,” Joe Ready, head of Wells Fargo Institutional Retirement and Trust, said in a statement. “But people seem to brush it off and stay the course, knowing it will help them in the long run in retirement. This type of investment discipline is an important part of an overall financial plan.”

The findings are part of the Wells Fargo/Gallup Investor and Retirement Optimism Index, conducted by telephone in February among 1,321 adult investors in households with total savings and investments of $10,000 or more. The sample was made up of 71% non-retirees and 29% retirees.

Wells Fargo said interviewing began a week after the release of January’s solid labor report, but also after a major sell-off on Wall Street, when the Dow Jones industrial average dropped below 24,000. By the time of the survey, the market was already starting to recover.

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

The Wells Fargo/Gallup Investor and Retirement Optimism Index stood at a 17-year high of +139 in the first quarter, up from +126 a year ago. The index last exceeded the current level in September 2000, when it was +147.

The survey found that 52% of investors were, at most, only mildly concerned about recent stock market volatility.

Forty-five percent were less sanguine — though below the 53% who expressed concern after stock market volatility in 2015 and 64% in 2016.

Fifty-three percent of female investors in the poll said they were very or somewhat worried about recent volatility, compared with 38% of their male counterparts.

Notwithstanding recent market swings, 60% of respondents said now was a good time to invest in the financial markets, the same as a year ago and higher than the average 51% recorded on this measure since September 2011 when this measure plummeted to 35%, according to Wells Fargo.

In addition, 49% of investors said they had considerable confidence in the market as a place to save and invest for retirement, up from 36% in February 2016. Asked to respond to a specific example, 53% said they could tolerate a market correction of 10% or more over the course of a year on a $10,000 investment.

“Taken together, these and other findings from the survey show many investors are optimistic about the future, yet realistic about any near-term challenges they may face in the current economic environment,” Ready said.

Effects of New Tax Law

The February survey turned up divisions among investors about how new changes to personal and corporate income taxes may affect various sectors of the economy.

Thirty-five percent said the changes to federal personal income taxes would be mostly good for them, while 13% said they would be mostly bad. The rest said they would not make a difference, or were unsure.

Forty-two percent of investors earning $90,000 or more expected the effect of the changes to be mostly good versus 14% who said it would be mostly bad. By contrast, 29% of those making less than $90,000 said the changes would be good for them, and 15% said they would be mostly bad.

Investors were also divided on whether the changes would be good or bad for the country as a whole: 36% said mostly good, and 25% said mostly bad. Slightly more said the new income tax law will be mostly good for the stock market and for job creation.

Meanwhile, a quarter of investors reported that their personal income taxes had already gone down as a result of the law, especially among non-retirees, while 8% said their tax bill had increased.

As for corporate taxes, 50% of respondents said the corporate tax cut’s effect on the market would be mostly good, and 9% said it would be mostly bad.

Forty-four percent said the corporate tax cut would be mostly good for job creation, 40% saw benefits for the country as a whole and 34% expected benefits for themselves personally.

Wells Fargo noted that the corporate tax cut could benefit investors if corporations passed some of their tax savings on to employees, such as through pay increases or one-time bonuses.

Four in 10 investors in the survey who are currently employed by a corporation said their company already had or would provide such a benefit to its employees.

Researchers asked investors whether they would be likelier to save for their retirement using pretax or after-tax investments under the new tax law.

Fifty-seven percent said their strategy would not change, while 19% said they would focus more on pretax investments and 12% said after-tax ones.

“Today’s low tax rates may make saving in after-tax investments such as Roth IRAs or Roth 401(k) plans a better choice for some investors than focusing exclusively on pretax investments like a traditional 401(k) or IRA,” Ready said.

“This is using the assumption that an investor’s personal income tax rate may be higher by the time they retire.”

Wells Fargo said one reason few investors were contemplating switching to after-tax accounts could be that only 25% of non-retired respondents were very familiar with the difference between traditional and Roth retirement accounts, while another 36% were somewhat familiar. About a third had little or no familiarity.

“By not making greater use of after-tax retirement accounts under the new tax law, people may miss out on a valuable opportunity to improve their tax diversification strategy, with after-tax Roth accounts providing tax-free income in retirement,” Ready said.

Retirement Planning Lags

The survey found that relatively few investors were highly confident they will have enough money to maintain the lifestyle they want throughout their retirement: only 34%, albeit eight percentage points higher than in 2014.

Forty-eight percent of retired investors were highly confident about this, compared with 28% of non-retired ones.

Pollsters also asked non-retired investors how much thought they had given to several aspects of retirement. These are retirement-related topics about which respondents said they given a lot or a fair amount of thought:

  • How to spend leisure time: 53%
  • Where they would live: 48%
  • Best age to take Social Security: 45%
  • Paying for routine medical care: 45%
  • Strategy to draw income from retirement accounts: 41%
  • How to pay for long-term care or assisted living: 37%
  • Amount of taxes they would pay in retirement: 34%

“The fact that about half of people haven’t given serious thought to their future taxes, healthcare expenses, draw-down strategy or Social Security could explain why only a third of investors are highly confident about their retirement savings,” Ready said.

“The act of thinking through these important drivers of retirement outcome can help inform people about their financial preparedness for retirement.”

According to the survey, non-retired female investors were more likely than male investors to have thought a lot or a fair amount about paying for long-term and routine medical care, males were likelier to have thought about their draw-down strategy.

— Check out These 3 Threats Scare Gen Xers More Than Basic Retirement Costs: IRI on ThinkAdvisor.