Widely followed survey paints too rosy a picture
At first glance, the 2021 Retirement Confidence survey conducted by the Employee Benefit Research Institute and Greenwald Research seems to pack good news. The widely-read survey shows that nearly 75% of us say we are confident in our ability to retire comfortably.
Retirement confidence with a big slice of worry
To suggest that three in four of us is sitting pretty on the retirement planning front is overselling things a bit. The survey finds that just 29% of participants describe themselves as very confident, while 40%+ fall into the more nebulous range of somewhat confident. Another 28% self-report as being “not too” confident or “not at all confident.”
Rather than the popular headline that nearly three in four workers are confident about their retirement, the breakdown suggests that in fact just one in three of us has enough confidence to not be worried about how things will play out.
And even that might be more optimism than confidence. Just 20% of people passed a retirement income quiz, which isn’t surprising given the absurd complexity of trying to work out a sustainable strategy for living comfortably in retirement without running out of money. Another quiz found that a big chunk of workers are not up to speed on important retirement planning rules of thumb.
How to boost your retirement confidence . . . for real
If you find yourself “somewhat confident,” there are plenty of steps you can take right now to move you toward “very confident” over time.
—Save for retirement today. The Employee Benefit Research Institute (EBRI) survey finds that people who have access to a retirement plan are nearly twice as confident than those that don’t have a plan. Sound obvious? Well, it’s certainly not automatic. Just half of private sector workers today have a workplace retirement pension and/or 401(k) plan. That means half of workers must run their own retirement plans (aka an IRA) and compel themselves to contribute as much as possible.
—Don’t assume your workplace plan is setting you up for success. Retirement planning experts say we need to save at least 10% of our salary to have a solid shot at retirement security.
Vanguard’s 2021 survey of retirement plans it runs shows that among plans that automatically enroll new hires — an increasingly popular feature — nearly 60% set the employee’s initial contribution rate at 4% or lower. Even with a generous company matching contribution, that’s going to fall short of 10% for at least a few years.
Some good news is that among plans that auto-enroll new hires, nearly 70% automatically increase annual contribution rates, though it’s typically just ratcheted up 1% each year. That means you’re still likely spending a few years under-saving before you hit 10% or more. And if you job hop and just accept the default contribution rate at your next job, you’re going to run into this under-saving trap again.
The fix is to check right now that your contribution and any company match are getting you to at least 10%. (A 15% rate is an even smarter confidence booster.) You can always change the default contribution rate the plan may have shuffled you into when you started.
—Reduce your spending. In the EBRI survey, just one-third of workers say they are very confident they will have the cash needed to cover their essential expenses in retirement. Debt is, no surprise, part of the problem. Less than half of workers surveyed who said they had a major debt problem expressed any confidence about having enough money in retirement.
Avoiding lifestyle creep is going to be your biggest friend here. Skipping the extra bedroom when buying a house, avoiding a too-big car loan payment, and not taking on gobs of PLUS loans to pay for your kids’ college, are big-ticket decisions that can generate sizable savings for decades. That not only reduces the lifestyle you need to support in retirement, it also frees up plenty of dollars today that you can stuff into a retirement savings account.
—Keep working past 62. Part time is fine. If you intend to retire from a full-blown career job in your early 60s (or management forces your hand), don’t automatically go into full-retirement mode. Even if it’s part-time work, any income you continue to bring in reduces the likelihood you will be tempted to start Social Security too early (more on this in a sec) and reduces what you likely need to start pulling out of retirement accounts.
—Hatch a plan to make it possible to delay Social Security until age 70. The Social Security program will boost your eventual benefit for every year between age 62 and 70 that you wait to start collecting. The benefit you get if you start at age 70 is 76% more than the benefit you get if you start collecting your retirement benefit at age 62. That alone can be the difference between being somewhat and very confident about your retirement security. But it takes planning before you hit your 60s to pull this off.
Jul. 27, 2021