Study: Active Retirement Savers are Better Prepared

August 25, 2006 (PLANSPONSOR.com) - The oft-repeated dire messages about how clueless retirement savers are about their impending financial challenges appear to have been heard, a new study has found.

A study by the Vanguard Center for Retirement Research found that 80% of active retirement savers questioned said they had given at least some thought to how they will manage money after they retire, their cost of health care in retirement, and how long their retirement might last. Nine in 10 said they have also pondered how much they will need to have saved in order to retire and, importantly, inflation’s potential impact on that nest egg, Vanguard researchers John Ameriks and Stephen Utkus said in their research report .

“Among the retirement saver population, our outlook remains guardedly optimistic,” Ameriks and Utkus wrote. “Americans saving for retirement do have a general awareness of the challenges they will confront in the future, recognize the limited role that Social Security will play, and are appropriately cautious in their self assessment about future outcomes. There is widespread recognition of the need to save more, and savings behavior is clearly linked to measures of

retirement confidence.”

Among retirement savers, roughly six in 10 are on track in their retirement planning, while another two in 10 need to make modest changes to theircurrent savings behavior and the timing of retirement. The final twoin 10 are at risk and will likely face significant difficulties in retirement,according to the research.

For the four in 10 Americans falling behind on their retirement savings, the Vanguard researchers said there is “mounting evidence” that auto plan provisions such as automatic enrollment help raise savings levels. “These designs are strategies that sponsors, financial services companies, and providers should encourage,” the researchers said. The researchers asserted that education programs and advisers can help by raising a warning flag regarding financially unsustainable early retirement plans, as well as by helping clients establish concrete, realistic goals for retirement.

Keep it Simple

Whatever plan sponsors decide to do to keep savers saving and help those who are not kick start a saving program, they should keep it simple. “Complexity creates barriers to decision-making among individuals. Any effort to simplify choices – whether in workplace or personal savings and investment programs, or in the tax rules governing retirement plans or accounts – could lead to better outcomes among retirement savers,” the report said.

Among those not yet setting aside enough, the Vanguard researchers said it is critically important to get a better handle on how much they will need when they finally stop working. Nearly four in 10 (39%) of the non-savers believe they need a retirement income that is 100% or more of their current income, while almost three in 10 (29%) feel they can get by with less than 60% of their current income.

Survey respondents were selected from a nationally representative online panel of more than one million households in February 2006. Respondents were age 40 and older and still in the workforce. They indicated that they are currently saving, or had previously saved, for retirement. The total sample size was 1,049 respondents.

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