The 2017 Wells Fargo Retirement Study denotes a “20-point surge in optimism” about the equity markets.
As explained by Joe Ready, head of Wells Fargo Institutional Retirement and Trust, this impressive one-year jump in optimism is about as strong as any bump the firm has measured in its annual retirement surveys. As he sees it, the results show the financial crisis of 2008-09 continues to recede into the background for most investors.
Indeed, as measured by the 2017 survey update, an investor who stuck with the markets since the last downturn has enjoyed one of the longest bull markets measured in American history.
“As part of our research we considered the power of compounded savings and market returns for a participant with a $50,000 401(k) account balance in the beginning of 2009. That balance would be $180,000 by September of this year, assuming modest returns and modest contribution rates,” Ready explains. “Had investors allowed the correction to scare them off, they would have missed out on that growth opportunity.”
And so one of Ready’s main takeaways from the latest run of the annual retirement survey is the “ongoing importance of reminding people to stay invested and to think about the long-term when making portfolio decisions.” He suggests right now is a sensible time to talk with participants about the importance of regular rebalancing and ensuring strong market returns—positive or negative—do not throw one out of alignment with their carefully considered risk tolerance or investing timeline.
Also notable in the data, this year fully half of retirees say they are spending more than expected on health care, and just over one in three say their standard of living went down measurably once they retired. But even with these challenges, the percentage of workers who say they will “have enough savings to live on comfortably” throughout retirement increased to 62%, compared to 52% in 2016.
“In addition, 46% say they will need to work until at least age 70, which is down from 50% last year,” Ready says. “This is a positive because there is ample data to show that most people cannot actually continue working until 70—and that most people retire before they were planning to.”
In spite of increased optimism, Wells Fargo finds a sizeable portion (38%) of workers still say they do not think they will reach their savings targets, and 48% say they believe their “standard of living will fall.”
“Again, one of the greatest hurdles appears to be health care costs,” Ready adds. “Fully 61% of workers say health care costs prevent them from saving more for retirement today.”
Heath care concerns across generations
Asked to choose the greatest threat to their current retirement savings, four out of 10 workers age 40 and over cite rising health care costs or catastrophic illness; on the other hand, four out of 10 workers in their 30s cite losing their job or not saving enough as their biggest threat.
The data also carves out members of the “sandwich generation” in between Millennials and Baby Boomers, tasked with taking care of both aging parents and their own younger children. This group is much more likely to cite rising health care costs as a major challenge compared with those people who do not have this dual set of responsibilities.
“Sandwich generation members are also more likely to cite higher health care costs as a reason they don’t save more right now for retirement,” Ready notes. “The sandwich generation is not a small group of people, keep in mind. This is something like 36% of the whole population—43% of women and 30% of men.”
In conclusion, Ready observes a simple truth about retirement savings in America: “Not surprisingly, workers who have had consistent access to tax-advantaged savings in the workplace have saved much more for retirement than those who do not have similar access. Among near-retirees, due to the power of compounding, the gap is quite large.”
He adds that he is optimistic about the future because there is strong evidence that Millennials are getting themselves on track to be a very success 401(k) plan generation. In rough figures, the average actively investing Millennial in the sample started saving nearly a decade earlier in life in a 401(k) than one measures among the Baby Boomers.
“People understand increasingly the importance of saving early for retirement,” Ready says. “Time is the biggest asset for retirement savers, so it’s good to see consistent savers getting a head start. For the 50-somethings in the survey, it’s getting harder to bend the curve as retirement closes in. This is why it’s important for those who are playing catchup to also understand what they can do to optimize their savings. They can do this by modeling when they take Social Security, the age they will retire, and how much they can afford to withdraw each month. All of these can have a meaningful impact.”