Can we change the retirement outlook for most Americans?

Published 10:35 am Wednesday, August 8, 2018

In a few short years, one-fourth of America’s population will reach or exceed the average retirement age. Now more than ever, we must question if our current retirement landscape and the Americans approaching their golden years are prepared to take on the challenge.
According to a new study, The State of America’s Workforce, by the Indexed Annuity Leadership Council (IALC), the current solutions to long-term savings are not reaching everyone equally. Nearly one-fifth of American workers approaching retirement are at the low end of the retirement readiness spectrum and there are significant differences across industries when comparing levels of readiness.
The State of America’s Workforce puts the influence of employers at the center of this retirement debate. The study found an individual’s retirement readiness is impacted by their access to employer-sponsored plans, employer helpfulness and their employers’ size, among other key influences.
Concurrently, the nature of jobs is incorporating more “gig” and part-time work, which opens the door for employers to offload responsibility when it comes to retirement planning support. As a result, for many individuals, retirement savings is a “do-it-yourself” endeavor, which can create challenges, as well as opportunities.
When the burden shifts to the individual, one must overcome cognitive biases that make long-term savings and planning difficult. For example, we have the following working against us, but we can overcome these errors in human judgment.
Do we wake up one day and proclaim, “today is the day I will find and contribute to a retirement plan!”? No. We think about our retirement plan when we start a new job and our employer enrolls us in the benefit plan, which can work well if the employer offers automatic enrollment. Plans that bypass the opt-in process surpass 90 percent participation, whereas participation is a dismal 40 percent without automatic enrollment. However, when there is no path of least resistance to retirement savings, we end up saving less or not saving at all.
With increased complexity comes indecision and procrastination. Research has found the more options a retirement plan offers, the fewer employees participated in those plans – even if it meant foregoing employer contributions. While plans may have simplified in recent years with a move towards target date funds, the complexity of making a decision (any decision!) still looms large. In The State of America’s Workforce study, 40 percent of Americans cited this procrastination — not saving early enough — as their key mistake.
At a minimum in retirement, we should expect to spend more, not less. Not only will we have more free time, but health will inevitably become a problem, leading to associated costs. Contrary to that, most surveyed by the IALC predict spending less, not more, in retirement. This calculation error is likely a result of rose-colored glasses. We think we’re at a lower risk of experiencing hardship and underestimate the need to save.
In an ideal world, the end-of-life math equation wouldn’t be a guessing game. Currently, individuals need to know when to start saving, how much to save and for how long. Long-term planning is hard enough when we know all related variables, but retirement planning is riddled with these unknowns.
The good news is that while these issues are challenging, they are not insurmountable. So, what can be done to improve retirement readiness?
The key to increasing America’s retirement readiness is providing options that offer certainty, while also introducing the urgency to start saving today instead of tomorrow. Currently, we rely on the employer to provide the main nudge to enroll in a retirement savings plan. This won’t suffice if like so many, our employer is not doing enough. In this case, breakthrough procrastination by creating personal deadlines for bettering retirement outlooks. Common Cents Lab found that people are motivated to make a change when there is a natural deadline or milestone, like the new year or turning 65. Starting is sometimes the hardest part, but setting deadlines even for small goals and sharing them with loved ones will necessitate needed decision points, as well as force attention on future needs.
Another option to introduce certainty into the retirement equation is exploring a retirement savings vehicle that provides a lifetime income, like a fixed indexed annuity. These options lean into our desire for certainty by providing a guaranteed lifetime income, no matter how long a retirement lasts. In multiple experiments, researchers Pfeffer and Hardisty found participants chose guaranteed immediate gains and losses over uncertain future gains and losses.
But the individual cannot do it alone and there is not a one-size-fits-all model for improving retirement readiness. But with increased dedication from all, we can mitigate the complexity and stress associated with retirement decisions, building a better financial future for all American workers.
(Kristen Berman is co-founder and principal at Common Cents Lab, a Duke University initiative dedicated to improving the financial well-being for low- to middle-income Americans.)

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