Finances in Retirement: New Challenges, New Solutions
– a capstone study culminating a series of studies investigating retirement
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Three major forces are converging in America today to transform the challenge of funding retirement:
- First, the massive Baby Boomer retirement wave is dramatically increasing the retiree population, adding about 10,000 new retirees a day. The U.S. population age 65+ will continue its dramatic rise over the next 30 years.
- Second, longevity continues to climb. Average life expectancy at birth is up to 79 years and is projected to continue to rise, adding nearly two years per decade. However, the average retirement age is little changed. That means more retirees will need to fund longer retirements.
- Third, the retirement funding formula is shifting dramatically. Most employers have discontinued guaranteed defined benefit pensions in favor of 401(k) and other forms of defined contribution accounts. And the long-term viability of Social Security benefits is in question.
Amidst this climate of change, Age Wave and Merrill Lynch began a strategic collaboration in 2012 to understand and address the most important areas of life to better guide Americans towards a satisfying and financially comfortable retirement. Finances in Retirement: New Challenges, New Solutions is the capstone of eight studies conducted in partnership with Bank of America Merrill Lynch, concluding a first-of-its-kind, four-year, 50,000-respondent investigation focused on the transforming nature of retirement through seven interconnected life priorities—family, work, health, home, giving, leisure, and finances. We also examine the choices and changes that people can make to become more financially secure in retirement.
- In a sea of major political, economic, environmental, and social challenges faced today, Americans are more likely to say their number one worry is their personal and family finances. Two-thirds of those we surveyed said that they are more worried about their finances than the nation’s finances.
- The three biggest retirement-related financial worries for most Americans are 1) a costly health issue impacting them or loved ones; 2) inflation – the rising cost of life; and 3) not having enough money to do what they would like.
- While most Americans realize retirement will be the biggest purchase of their lifetime, costing 2.5 times the price of an average home, 81% say they do not know how much they will need to fund their retirement.
- While most people say they want to live to the age of 90, only 27% of pre-retirees age 50+ feel financially prepared to fund a retirement that lasts 10 years, let alone 20-30 years.
- Americans are saving only a fraction of what they think they should – 5.5% vs. 25% of their annual income after taxes.
- People say the cost of basic expenses and prioritizing paying down debt are the two biggest barriers to saving more for retirement.
- More than half of Millennials feel a secure retirement is beyond reach, other than for a select few, compared to 30% of Boomers who feel this way. And Millennials expect 65% of their retirement income to come from personal sources, including savings and continued employment—far more than earlier generations.
Bridging the Intention-Action Gap
Today’s picture of retirement readiness shows significant room for improvement. Americans age 50+ graded themselves a “C-minus, on average, for financial and savings behaviors. The survey also found the need to both encourage new discussions and break some taboos around sensitive, but important financial topics in order to close knowledge gaps and increase confidence:
- Too much financial jargon: Sixty-five percent of Americans say the language of finance is confusing and not user-friendly.
- Low financial confidence: Americans are most likely to second guess decisions related to personal finance (36%)—far more than work (18%), health (15%) or their home or living situation (8%).
- Taboo conversations: Americans are 7x more likely to say that talking about personal finances is taboo than they are to say it can be discussed openly. While people seem very willing to discuss a wide range of personal issues with their best friends, only 11% feel comfortable discussing their personal finances with them.
- Trigger points: Among those saving for retirement, the top triggers that got them saving were an employer offering a retirement savings plan (46%) or information about retirement benefits (26%), rather than reaching a certain age.
New Choices: Course Corrections to Strengthen One’s Retirement Finances
Although most retirement preparedness studies have focused primarily on savings patterns, this investigation uncovered myriad trade-offs many Americans age 50+ would consider in order to improve their financial security during retirement. Some examples of course corrections include:
- Health: Ninety-one percent would make healthier choices to reduce potential expenses in later life, and the same percentage would use more generic medications and supplies. Sixty-eight percent say they would consider purchasing long term care insurance.
- Work: Three-quarters would be willing to work longer, preferably part-time, to shore up their savings (note: only 43% would consider working full-time); and 67% would be open to learning new skills to be able to work at something different.
- Family: Eighty-four percent would like to educate their family on ways to be more financially independent (9 in 10 of all Americans want basic financial education to be a standard part of high school curriculum); 70% would consider cutting back on support to adult children; only 30% would ask family members to provide financial help to them.
- Leisure: Ninety-five percent of retirees say they’d prefer to have more enjoyable experiences than buy more things; 81% would increase use of community recreation programs; and 70% would be willing to stay with friends or family when traveling to reduce costs.
- Home: Three-in-four say they would downsize their home to both lower ongoing costs and benefit from the equity; 67% would be willing to move to a less expensive location; and 47% would consider selling their home and renting something smaller.
- Giving: Three-quarters would volunteer more of their time and reduce monetary donations; 71% would consider leaving less to their loved ones; and 69% would be willing to barter their time and skills with others in exchange for their time and skills.
- Finances: Ninety percent of people would be willing to cut back on basic expenses; 77% would increase use of tax protected retirement accounts; two thirds would sell belongings or real estate that they no longer need; and six in ten would adjust the timing of their Social Security benefits.