What does it mean to be retirement ready? In general, retirement readiness is the ability to live comfortably for the now-prolonged retirement period. Unfortunately, most Americans are not at the point where they can replace the recommended 80% of their income. Stig Nybo, president of Pension Sales and Distribution, and Patricia Advaney, chief marketing officer, both of Transamerica Retirement Solutions, spoke with Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR about how to address that problem and get more Americans on track with retirement savings.
PS: What is the current state of retirement readiness in America?
Nybo: In a word, we’re unprepared. We haven’t prioritized saving in the way that we need to in order to be secure. If you looked at the root of that, we’ve got low financial literacy, and consumerism is at a high. Even with the credit crunch, you have the ability to borrow, and people live on leverage. Couple all of that with the fact that people are living longer, and that ends up being a recipe for a bad outcome. We’re just not saving enough for retirement, and we simply have to change that.
PS: Why are some people so much better at preparing for retirement?
Nybo: I think it comes down to having formed the right habits around saving that has helped people get to that point.
In its 12th annual survey, The Transamerica Center for Retirement Studies identified “future early retirees.” They represent about 20% of our population and have developed habits that prioritize saving. They save more than they need to save in order to retire on time. They understand how to curtail their inclination to consume. They just spend less than they earn and save the remainder.
We’ve termed these people “Super Savers.” What we need to think about is how we can get more people to adopt these habits, to have that awareness around spending versus saving, and to create a lot more “Super Savers” out there.
PS: What are the greatest drivers of retirement readiness success?
Nybo: The drivers fall into two basic categories. One is context, the context that we set for people and that they set for themselves around savings. The other is the power of our beliefs at a societal as well as an individual level. Context includes things like automatic enrollment or how “pro-savings” your workplace is. Maybe you have a plan captain that has been tasked with really helping people understand that plan. That’s a form of context.
Defaulting into an age-appropriate investment through auto-enrollment and auto-escalation is also a very simple form of context. But context can really expand to what kind of environment the plan sponsor, the advisor, the third-party administrator (TPA) and the plan provider have set for that participant. That is really going to be the biggest driver of behavior during an individual’s employment.
The analogy that I like to use is that of a garbage can. If you’re thinking about whether or not you’re going to throw a piece of trash away, the biggest contextual driver of whether you’re actually going to do that—versus littering—would be the presence of a garbage can. If a garbage can is right there, that’s setting the right context for you to avoid littering.
We have to set that pro-savings context within the workplace, which is where people actually do save.
The other thing that we have to do is think about how we can change people’s beliefs around savings. If you look at how long the average person stays with one employer, the median tenure is about five and a half years. That means that people’s context will change every five and a half years. At that point, we rely heavily on what they believe in order for them to continue their savings habits.
In other words, do they roll the money that they’ve saved over to another employer-sponsored plan or to an individual retirement account (IRA), or do they simply go out and spend it because they feel that they had a windfall?
If we set the right context for employees as they save for retirement, and if we go about changing their beliefs, we end up having a very holistic approach to changing people’s behavior, which is ultimately what we’re looking to do.