The news isn’t rosy for retirees: Nearly half of Americans have no retirement savings, and the median 401(k) balance is under $10,000 for those who have saved, said Steve Wendel, head of behavioral science for Morningstar, in his paper Easing the Retirement Crisis: How Financial Planning and Personalized Advice Can Head Off Extreme Austerity. Further, a recent study from the Employee Benefit Research Institute found that only 17% of American workers felt very confident in their ability to retire comfortably.
Wendel met with reporters during the 2018 Morningstar conference in Chicago, where he pointed out that less than half of American households are on track for retirement, and that drops to less than a third in bad markets.
But today’s headlines can lead to extreme and disheartening outcomes, Wendel said, adding that some have suggested that to meet their retirement needs, workers would now need to put away 20% of their income, live off 40% of their final salary, or delay retirement by 10 years. None of these ideas are realistic, he said.
“What can we do about it?” the behavioral scientist said. “The solution is more holistic.” In the study, they found that if workers saved 6% of their earnings and delayed retirement to 67 years old, “that gets 72% of Americans in a good place,” he said. For the mass affluent, these actions would boost “retirement readiness” from 45.3% to 72.9%.
“Today the contributions rates, with the biggest default being 3%, [are] woefully low,” he said. The study found that no single default is appropriate; instead, a personalized analysis of what each household needs is the real answer.
By using certain levers, people can change their behavior, Wendel said, and found the two simple actions of increasing savings to 6% and delaying retirement age by two years would help all age groups attain their retirement goals.
“By and large, people don’t change,” he said. “But what can change is the environment people are in.” Advisors can encourage clients to look every six months at where they are in their “performance toward their [retirement] goal,” not performance versus the stock market.
He also said advisors should show clients, especially younger ones, how their savings compare to others their age, as they have found this can spur some competitive action. This in addition to the other simple levers can help push Americans to save more for retirement, he said.
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