Workers Over 40 Aren't Saving Enough for Retirement: IRI

Most workers older than 40 have inadequate retirement savings and are not saving enough to catch up, yet most expect retirement income far greater than even the highest Social Security benefits, according to recent research by the Insured Retirement Institute, a trade group for the annuity industry. 

Although workers also believe that protected lifetime income is a critical characteristic of a retirement investment, they need to save more to produce that income, the findings showed.

IRI conducted the consumer survey in March to gauge the retirement savings behaviors, retirement preparation steps, retirement expectations and retirement investment preferences of 990 workers ages 40 to 73 who are employed part or full time.

The study found that retirement saving behavior does not support the retirement income expectations of many workers. Thirty percent of respondents thought they would retire before age 65 and therefore see reduced Social Security benefits. Fifty-eight percent of workers believe they will need at least $55,000 in annual retirement income. 

But only 41% have tried to calculate how much they will need to save to meet retirement income expectations, so they are not connecting income potential to their savings.

“Older workers are under saved and regret that they have not saved more or wished they had started saving earlier,” Frank O’Connor, IRI’s vice president of research and outreach, said in a statement. “Improving retirement prospects requires an increase in the percentage of income saved.”

The survey found that while 74% of workers are saving for retirement, savings rates are not nearly high enough for even the youngest respondents to grow their nest eggs to a level sufficient for meeting their income and budget expectations.

“These findings highlight the importance of plans not only auto-enrolling but auto-escalating retirement plan participants to increase savings rates,” O’Connor said.

IRI noted that some employer-provided retirement plans automatically enroll workers and deduct a percentage of each paycheck to contribute to the plan, while others automatically raise the percentage deducted annually up to a maximum of 10%. Employees can opt out of the auto-enrollment and auto-escalation at any time.  

Guaranteed Income and the Secure Act

The survey also found that workers overwhelmingly favor considering retirement investment options that guarantee income for life. Seventy-seven percent of respondents said they would be likely to allocate to an in-plan variable annuity with a lifetime income guarantee. 

O’Connor said the enactment of the Secure Act in 2019 should help workers. “Measures included in the law made it easier for employers to offer retirement plans and lifted barriers to make protected lifetime income solutions, and other types of annuities such as fixed indexed and Registered Index-Linked Annuities, more available within those plans.”

The IRI survey noted that the lifetime income disclosure provision in the Secure Act should help workers better understand how their retirement balances can deliver monthly income. A final regulation to implement this provision is expected later this year. It will require retirement plans to illustrate how much monthly lifetime income a retirement account balance could provide. 

Participants in IRI surveys conducted before the passage of the Secure Act said such illustrations would prompt them to increase the percentage of income they contribute to their plans.

IRI said an encouraging survey finding was the level of interest workers have in adding annuities to their workplace defined contribution retirement plans. Seventy percent of workers in the 40-to-45 age cohort said they are very or somewhat likely to allocate a portion of their plan to annuities.

New Retirement Security Legislation

With these preferences and trends in mind, Congress is considering new retirement security legislation that includes provisions from IRI’s Retirement Security Blueprint. 

Among the key features of the legislation is an automatic enrollment provision for new employer-provided retirement plans. The measure also increases a tax credit for small-business owners to encourage them to offer their employees a retirement plan. 

For older workers, the legislation allows larger catch-up contributions for baby boomers nearing retirement. The legislation also increases the age at which retirees must take minimum distributions from retirement accounts. 

And it affords more workers and retirees the opportunity to protect their retirement income to insure against the risk of outliving their accumulated retirement savings, allowing more time for savings to grow.