Vanguard: Key Savings Problem is Goal-Setting

January 6, 2005 ( - The problem is not that most workers don't already know they should be saving more for retirement, but specifically how to translate those hopes and dreams into a concrete financial plan of action, a new study suggested.

A research report by The Vanguard Center for Retirement Research, a unit of The Vanguard Group mutual fund family, asserted that general workplace savings programs simply urging employees to beef up their retirement plan deferral won’t do the trick.

“Retirement investors appear reasonably aware of the importance of such issues as savings adequacy, investment and inflation risk, longevity risk, and the risks of financing health care in retirement,” Vanguard researchers wrote in the report, Expectations for Retirement: A Survey of Retirement Investors. “Yet it is also clear that many individuals, while aware of these risks, have difficulty translating awareness into concrete savings plans. There is strong evidence that many lack concrete goals and objectives, possess weak planning skills, and exhibit a high level of inertia and procrastination.”

The Vanguard researchers said a trend toward instituting automatic deferrals (See Auto Enrollment Choices Impact Cost, Participation ) – where workers are automatically enrolled in their plan and/or signed up for savings increases over time as a plan default – “is a very positive step in this regard.”

Further, the researchers cautioned plan sponsors not to have investment advice providers focus too heavily on helping participants choose particular investment options and instead help them make sure they’re saving enough. In fact, only about a third of participants surveyed for the research are on track to end up with sufficient retirement assets. “In light of our results, the emphasis should be shifted toward a correction of the misalignment of income goals with assets and savings behavior,” according to the report. “…It appears that the critical priority today concerns goal-setting and savings rates, not investment product selection.”

Realistic Return Expectations

Easing the task of helping participants see the light regarding retirement savings, according to the researchers, is that participants were cautious about future stock market returns in the Vanguard survey. The average participant expected an 8% equity return over 10 years; a third said they predicted 6% or less. “In our view, these lowered expectation for equity returns are a welcome event as it no longer appears that investors are anticipating that outsized market returns will rescue their retirement plans,” the researchers wrote. “In this more sober environment, retirement investors may be more amenable to the recommendation that they need to focus on their own savings behavior – not the equity markets – as the mainstay of their planning efforts.”

According to the survey conducted for Vanguard by Greenfield Online, a US marketing-research firm, nine out of 10 investors have given at least some thought to whether they are saving enough for their golden years, and even to the impact inflation may have on their nest eggs. Even so, eight of 10 feel they aren’t saving enough with only 41% having determined a target asset accumulation goal.

Other survey findings included:

  • On average, retirement investors report they will need 70% of their current income to maintain their standard of living during retirement – a figure that’s in line with what many financial planners recommend.
  • Unfortunately only about third were on their way to putting aside enough to reach that goal after saving at double-digit rates with plans to retire at an average 66 years old. Another third are “potentially secure” – meaning they can reach the 70% goal if they beef up their savings now by doubling their savings rate and putting off their retirement until their late 60s. The remaining participants are financially “at risk” because even if they double their savings and don’t retire until 70, they still may fall short of the 70% savings goal.
  • Participants may be overly fearful of market risk. They told pollsters that there is a 50-50 chance of stock falling by a third in any given years when, in fact, the risk is actually 2% based on historical data.
  • Many people know they should be saving more, but they just aren’t doing it. Sixty-two percent of survey respondents said they weren’t saving enough, and 19% said they weren’t sure whether or not they were. Off the 62% who said they weren’t saving enough, the problem apparently wasn’t lack of a specific goal, but rather the inability to change current behavior.

The survey was based on responses by 1,000 investors who took part in a larger online panel. Conducted in June 2004 and completed in November, it relied on feedback from retirement savers age 40 or older.

The research report is at .