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Potential for Outliving Retirement Savings Is High: State Street

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According to a new study from State Street Global Advisors, current savings rates may present some challenges.

State Street conducted an online survey of 9,451 people across eight countries that looked at every stage of the retirement spectrum, from those new to the workforce to those later in retirement itself, to better understand the milestones and inflection points across the whole savings journey. State Street recently release a report based on this survey’s findings, called Balancing Flexibility and Security in Retirement.

The countries included in the survey were the United States, Australia, the United Kingdom, Ireland, Italy, Germany, Sweden and the Netherlands.

According to Catherine Reilly, global head of research for State Street Global Advisors’ defined contribution business, these countries all are introducing defined contribution savings as part of the global shift away from defined benefit to defined contribution.

In most of the countries that State Street surveyed, a majority of people said they are saving less than 10% of their income.

This “is less than you would want to see,” Reilly said.

According to the report, this finding stands out both for being consistent across varied markets and for being inadequate as standalone savings.

The consistency of the less than 10% savings rate is notable given that required minimum contribution rates vary widely by country, the report found.

At one extreme, in the U.S., DC plan contributions are voluntary for both employers and employees. Meanwhile, Australia mandates a 9.5% employer contribution and in the Netherlands, the required contribution rate is on average 20% to 25% of salary, with the employee contributing 4% to 6%, on average, and the employer responsible for the rest.

For those who are saving less than 10% on a pure DC basis — net state pension or social security income sources — “the potential for outliving retirement savings is high,” according to the report.

“In the current market environment, a participant who saves 10% of her salary from age 25 to 65 could expect to receive a replacement rate of about 30% of their salary at retirement,” the report stated. “This should give individuals and providers across the globe pause to consider course corrections.”

There was a positive finding counteracting this retirement income shortfall, according to Reilly.

“When you ask people how they were going to make up any income shortfall in retirement, particularly younger respondents, they seem to have embraced the idea that if you’re going to be living longer, then that means you also need to work until an older age,” she told ThinkAdvisor.

The study found that particularly the younger people surveyed — 47% of the population that is currently working and 47% of those within five years of retirement — said they would be retiring later.

Of the people who had a retirement income shortfall, 61% said they were planning on working part time during retirement.

Reilly said that this is a “huge change” compared to the people who are currently retired. The survey found that only 9% of the currently retired people are working in retirement.

“People are planning on changing their behavior in order to affront the retirement challenges that they face,” Reilly said.

Dave Ireland, senior managing director and head of global defined contribution at State Street Global Advisors, found another promising attribute — particularly among U.S. workers — when it comes to the retirement income shortfall facing many.

“When we ask things in terms of do individuals feel responsible for owning their retirement outcomes and their destiny, and 85% of active U.S. workers said that they’re most responsible for ensuring that they have sufficient income in retirement,” he told ThinkAdvisor.

Rather than pushing the responsibility off onto the employer, there was a high degree of ownership among these survey respondents, he added.

“While those individuals are not saving as much as they need to in order to hit that target today, they’re aware of it and they’re making changes to adjust for the under-savings,” he said, “understanding that they’re living longer and potentially working longer.”

Ireland explains that workers are extending their saving period and as a function of that they will compress their spending period.

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