American investors are less optimistic about maintaining household income and reaching their short- and longer-term investing goals than they were a year ago, according to the latest Wells Fargo/Gallup Investor and Retirement Optimism Index, released Tuesday.
The index, which measures U.S. investor confidence in the investing climate, fell to 85 for the second quarter, down from 103 during the same period in 2018.
Sixty-one percent of investors said recent stock market performance had made them concerned that the market was peaking.
Another recent poll found investor and advisor optimism waning since the start of 2019 because of market volatility.
Six in 10 investors in the Wells Fargo/Gallup study described the economy as solid or booming, but many sensed a recession in the offing. Eleven percent said one would begin later this year, and 40% said it would start in 2020.
However, 72% of retirees and 64% of non-retirees considered themselves prepared for how they would handle their investments in the event of a recession.
“It is good to see that two-thirds of investors feel they are prepared to handle their investments during a recession,” Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute, said in a statement.
“While we do not see a recession in the near term, in many ways we are still recovering from the last one — which left a deep scar on many investors. This sense of preparedness is a positive sign.”
The Index of Investor Optimism has an adjusted baseline score of 100 from when it was established in October 1996. It peaked at +152 in January 2000, and hit a low of -81 in February 2009.
The index results were based on a Gallup Panel web study completed in May by 1,240 U.S. investors, defined as adults in a household with stocks, bonds or mutual funds of $10,000 or more, either in an investment account or in a self-directed IRA or 401(k) retirement account. (About two in five U.S. households have at least $10,000 in such investments, the report said.)
The sample comprised of 71% non-retirees, whose median age was 46, and 29% retirees with a median age of 68. Of total respondents, 58% reported annual incomes of $90,000 or more, and 42% reported less than $90,000.
Looking Forward to Retirement
Three-quarters of investors in the survey said they had put a lot or a fair amount of thought into achieving their financial, family and lifestyle goals in retirement, compared with only 46% who said they had given the same thought to planning their life during their working years.
“It’s fascinating that investors have given so much more thought and planning to their retirement years than to their working years,” McMillion said. “Those working years are the ones when people are making lots of decisions about work, raising families and buying homes, and planning could be helpful.”
A gender gap appeared in the latter instance, but not in the former one. Fifty-two percent of men in the survey versus 38% of women said they had given at least a fair amount of thought since entering work to how they would achieve their career, financial, family and lifestyle goals during this phase of life.
By contrast, 77% of men and 73% of women said they had given considerable thought and planning to retirement.
The Gallup poll asked non-retirees which of five possible factors gave them the most trouble when planning for retirement. Ranked first was not knowing how much money they would need to maintain their standard of living, closely followed by health care. Not knowing how long they would live came in third.
Twenty-one percent of investors expressed high confidence that they would have enough money to maintain their preferred lifestyle in retirement, while 53% were somewhat confident and 26% were not too confident or not at all confident.
Note to the incumbent and his Democratic challenger in the 2020 presidential election: 76% of respondents said health care was their top issue. Seventy percent said their main election issue was Social Security, and 69% said it was the economy.
“Health care is an unknown cost for many, and it becomes even more of a concern as people age and try to factor those costs into retirement planning,” McMillion said.
The survey identified various strategies non-retired investors said they were deploying to catch up on their retirement savings:
- Paying off high-interest debt – 80%
- Increasing the amount they are saving – 54%
- Deciding to retire later than their preferred retirement age – 52%
- Cutting way back on daily expenses – 38%
- Making catch-up contributions – 32%
- Downsizing their home –13%
- Working a second job –12%
Although four in five non-retirees in the survey reported having a 401(k)-type retirement savings plan, the amount they planned to defer this year fell far short of the allowable maximum savings. Across all age groups, only 18% said they planned to save the maximum allowed savings for their age.
On average, investors under 50 said they planned to save $8,969 in their 401(k) this year, less than half the maximum allowable amount of $19,000. Those 50 and older planned to save an average $10,761 in their 401(k) this year, less than half the maximum allowable contribution of $25,000.
Invest Now, but Don’t Spend
Two in three investors surveyed said now was a good time to invest in the financial markets, a finding consistently seen in the poll since the start of 2018.
Fifty-three percent said the rise in markets had bolstered their confidence about their retirement savings. Yet, only 44% reported that the rise in markets had made them feel more confident about spending more money or making major purchases.
According to the study, investors as a whole reported having an average 44% of their savings invested in stocks. Asked to think ahead to their portfolio at age 80, they estimated that they would have just 26% invested in stocks at that time.
The survey found virtually no difference between the estimates of current stock exposure given by retirees and non-retirees. However, when looking ahead to age 80 or older, retirees estimate that they would have 33% of their savings in stocks, while non-retirees estimate 23%.
McMillion noted that historically, investors had been advised to shift into a more conservative portfolio as they moved into retirement because they had less time to recover from market corrections and were often withdrawing funds for living expenses.
But with low interest rates expected to persist in the bond market, she said, “it may be appropriate for retirees to maintain higher allocations to equities, but they need to assess the increased volatility risk that comes with holding equities.
“Meanwhile, non-retirees may not be taking full advantage of the growth potential of equities over time and may need to increase their exposure.”
The survey found that non-retirees were not taking major precautions to guard against a future recession. Just 18% said they would delay a home purchase, while only 23% planned to delay retirement.
However, many respondents reported that they were preparing by taking actions that the study said are good financial practices at any time. Fifty-nine percent said they would increase their savings, and 52% said they would reduce spending.
In addition, 22% reported reducing their stock holdings and 15% increasing their bonds. About half were diversifying their portfolio more, and half were also increasing their cash holdings.
— Check out We Don’t Have to Have a Recession on ThinkAdvisor.