“We were sort of surprised it was as high as it was,” Van Harlow, director of investment retirement solutions at Putnam Investments, told PLANSPONSOR. In an ideal world, he added, the number would be about 75%.
Social Security also plays a large role in the income replacement projection, which would fall to 22% without it. “Social Security is a critical underpinning in most Americans achieving retirement security, retirement preparedness,” said Ed Murphy, head of defined contribution at Putnam Investments.
In addition to Social Security, the Putnam Lifetime Income Score (LIS) survey takes into account a variety of financial factors including defined benefit and defined contribution assets, personal savings, home equity, business value and potential inheritance. This year’s survey, for the first time, also incorporated mortality rates associated with a variety of common health conditions.
Those best positioned for retirement success share three characteristics, according to the LIS research report: having access to workplace savings plans, deferring 10% or more of their income and working with a financial adviser.
Access to Workplace Retirement Plan
Workers who are eligible for a workplace retirement plan are on track to replace 73% of their income versus 41% for those who do not have such access, according to the LIS survey. Active participants in a 401(k) plan are currently on track to replace 79%.
Workers in the educational services industry are likeliest to be eligible for a workplace plan (82%), and are collectively on track to replace 72% of current income, while those in the leisure and hospitality industry—the least likely to have access to workplace savings (54%)—are only on track to achieve 55% replacement.
Overall, the study found that American households deferring 10% or more of their income to retirement savings are on track to replace more than 106% of pre-retirement income. Further, when LIS is evaluated by household income, 15% of all households earning less than $50,000 per year are on a current trajectory to generate 100% or more.
The survey found that high scores can and are being achieved by individuals across the income spectrum, which underscores the significance of consistent savings behavior.
The Importance of a Financial Adviser
Investors’ decisions about whether to use a financial adviser have a significant impact on LIS. Those who worked with a paid adviser scored at the 80% level, while those who did not only scored 56%. Of workers currently in line to produce 100% or more of today’s income in retirement, 39% report having an adviser. “Clearly the influence of the adviser and the impact they have is pretty material,” Murphy said.
In addition to having an adviser, workers who are most prepared for retirement—on track to replace 100% or more of their income in retirement—tend to be younger (under the age of 50); male; better educated; and higher income earners.
Putnam’s third annual Lifetime Income Score research report surveyed more than 4,000 working Americans.