retirement security: public perceptions and misperceptions 2005 nasi annual conference january 28,...
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Retirement Security:Public Perceptions and
Misperceptions
2005 NASI Annual ConferenceJanuary 28, 2005
Discussion Leaders: Anna RappaportMathew GreenwaldRobert A. Rosenblatt
MATHEW GREENWALD & ASSOCIATES, INC.
2
Context
• Variety of studies show misinformation, but no prior source unified data
• SOA Committee on Post-Retirement Needs and Risks led 3-way partnership to:– Identify documented areas of misinformation
– Organize into unified paper
• Three partners: SOA, LIMRA, Mathew Greenwald & Associates
• 10 key issues identified• These should be considered together with
findings on behavioral finance
3
Savings Goals
• A majority have not tried to estimate how much money they will need for retirement.
• Many of those who have calculated this amount appear to underestimate how much money they will need to accumulate.
4
Savings Needed for Retirement
18%
8%
11% 11%
14%
3%
36%
41%
8%6%
8%
5%
0%
33%
16%
13% 13%
8%
13%
3%
35%
8%
3%
12%14%
20%
3%
39%
Less than$250,000
$250,000-$499,999
$500,000-$999,999
$1.00-$1.49million
$1.5 + million Could not docalculation
Don't know/Don't
remember
Total < $35,000 $35,000-$74,999 $75,000 +
Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey
5
Replacement Ratios
What People Need* What People Think They Need**
Pre-Retirement Income
Replacement Ratio (%)
Replacement Ratio
% of Workers
$20,000 89 Less than 50% 10
$40,000 80 50%–70% 28
$60,000 75 70%–85% 28
$80,000 77 85%–95% 11
$150,000 85 95%–105% 8
$200,000 88 105% or more 7
$250,000 88 Don’t know 7
*Source: AON Consulting/Georgia State University, 2004 Replacement Ratio Study
**Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey
6
Retirement Age and Working in Retirement
• The chances are high that some workers will retire before they expect to.
• Many workers expect to supplement their retirement income with earned income.
7
Timing of Retirement Among Retirees
36%39%
43%39%
37%
55%
49% 50% 50%52%
6% 6% 6% 6% 6%
2000 2001 2002 2003 2004
Earlier than planned About when planned Later than planned
Source: EBRI/ASEC/Greenwald, 2000-2004 Retirement Confidence Surveys
8
Working in Retirement
71%
29%
Workers planning to work forfinancial reasonsWorkers planning to work only fornon-financial reasons
65%61%
66%70% 68%
22%26% 24%
28%32%
2000 2001 2002 2003 2004
Workers planning to work for pay
Retirees who worked for pay
Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey
9
Longevity Risk
• A confluence of trends is placing longevity risk squarely on the shoulders of retirees.
• Many people plan to live to life expectancy yet do not understand they could live much longer.
10
DB on the Decline:DB on the Decline:Percent of Workers Participating in a PlanPercent of Workers Participating in a Plan
0%
10%
20%
30%
40%
50%
60%
1989-1990
1990-1991
1991-1992
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1999 2000 2003
Defined benefit Defined contribution
*InterpolatedFigures represent private industry only. Source: U.S. Department Of Labor, Bureau of Labor Statistics
*
11
Employer-Sponsored Retiree Health Employer-Sponsored Retiree Health Benefits DisappearingBenefits Disappearing
20%
30%
40%
50%
1992 1994 1996 1998 2000 2002 2004
Before age 65 Age 65+
% o
f la
rge
em
plo
ye
rs s
po
ns
ori
ng
Source: Mercer Human Resource Consulting
12
Survival of 65-year olds
0%
25%
50%
75%
100%
65 70 75 80 85 90 95 100 105 110
Male Female
ex =
81
ex =
84
Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Mortality rates based on 1999 experience.
13
Probability Distribution of Deaths
0%
1%
2%
3%
4%
5%
65 70 75 80 85 90 95 100 105 110
Male Female
Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Mortality rates based on 1999 experience.
14
Life Expectancy at Age 65
15%
23%25%
7%
14%
7%8%
5%
13%
22%
7%
27%
18%
7%
<75 75-79 80 81-84 85 86+ DK/Ref
Males
Females
Source: Society of Actuaries, 2003 Risks and Process of Retirement Survey
15
Long-Term Care
• Many people underestimate their chances of needing long-term care.
• The percent of people owning long-term care insurance or that could self-insure an extended long-term care situation is low.
16
Why Don't You Own LTC Insurance?
67%
28%
21%
19%
16%
14%
9%
9%
9%
6%
54%
25%
17%
17%
29%
14%
11%
5%
5%
Too expensive
Don't need it
Medicare will pay
Have enough assets
Don't know enough
Medicaid will pay
Don't want to think about
Too complicated
Don't qualify
Not recommended
Retirees
Pre-retirees
Source: LIMRA International, 2002, Retirement Risks – How They Are Viewed and Managed
17
Lump Sums and Payout Annuities
• Guaranteed lifetime income has many positive effects
• A majority of people desire guaranteed lifetime income in retirement
• Retirement benefits increasingly available in lump sum form
• Election of lifetime income options is low.
18
36%
60%55%
41%
Guaranteed income sources will NOT be enough Interest in annuity concept
Retired
Not retired
Demand for Annuitization is SignificantDemand for Annuitization is Significant
Source: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets
19
Investment Returns
• Workers have more responsibility than before for managing investments for retirement.
• Many workers misunderstand investment returns and how investment vehicles work.
20
5-Year Average Annual Return
Anticipated 5-Year Average Annual Return
(mean %)
Stocks on the New York stock exchange 10.9
Bonds issued by large corporate entities 8.1
Money market funds 7.7
Stable value funds 7.6
Source: John Hancock, 2002 Defined Contribution Survey
21
Investment Risk
Average Rating of Investment Risk(5-point scale)
International/global stock funds 4.1
Domestic, diversified stock funds 3.6
Company stock 3.1
Money market fund 2.5
Domestic bond fund 2.4
Source: John Hancock, 2002 Defined Contribution Survey
22
Financial Planning Help
• A significant portion of retirees and pre-retirees do not seek the help of a “qualified professional.”
• There are no standards for “qualified professional.”
• Yet, there is strong desire to work with a financial professional.
23
Individuals Consulted for Rollover Decision – Retirees
42%
36%
24%
22%
16%
9%
14%
7%
5%
1%
1%
5%
2%
27%
25%
13%
10%
5%
3%
7%
2%
1%
0%
3%
1%
3%
Family/friend
Fin'l Planner
Inv. Advisor
Employer
Accountant
Banker
Full-service broker
MF Co. Rep.
Ins. Agent
Discount broker
Outplacement counselor
Lawyer
Other
Consulted
GreatestInfluence
Source: LIMRA International, 2002, Opportunities in the Pension Rollover Market – Employee Perspective
24
Advisors Used to Plan Retirement –Retirees
70%
63%
36%
35%
33%
24%
5%
65%
46%
30%
32%
27%
21%
5%
43%
24%
16%
14%
13%
12%
30%
Employer
Financial planner
Accountant
Stockbroker
Lawyer
Insurance agent
None of the above
Extensive
Some
Little/none
Source: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets
25
Self 22%
Employer 27%
Professional51%
Professionals preferred
overall, especially for
financial risks
DB plan income
recipients prefer employer-
sponsored planning
Base = Respondents with exclusive preference for one type of sponsorSource: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets
Exclusive Preference for Planning Sponsorship
26
Sources of Retirement Income
• Workers misunderstand what their primary sources of income will be in retirement.
27Source: EBRI/ASEC/Greenwald, 2003 Retirement Confidence Survey
Expected and Actual Major Sources of Retirement Income
31%29% 28%
26%23%
20%
12%
7% 6% 6%
11%
37%
13%
56%
17%
8%5% 3% 4%
9%
Workers Retirees
Pension Employeecontrib. toworkplace
ret. plan
Employercontrib. toworkplaceret. plan
SocialSecurit
y
Employ-ment
Othergovernment
programs
Supportfrom
children/other family
Otherpersonal savings
Sale of
business
Sale of
home
28
Process of Retirement
41%
32%
16%9%
71%
16%
7% 5%
Stop working all atonce
Continue to workfor pay part time or
periodically
Gradually reducethe number of
hours you workbefore stopping
completely
Continue to workfor pay full time
Pre-retirees Retirees
Source: SOA, 2003 Risks and Process of Retirement Survey
29
Inflation
• Inflation has become a fact of life that for most has been managed through pay increases.
• While many pre-retirees and retirees are concerned about inflation, few have adequate means of managing their incomes on an inflation-adjusted basis.
30
-15%
-10%
-5%
0%
5%
10%
15%
20%
1944 1954 1964 1974 1984 1994 2004
Inflation Facts – Last 60 years
Source: U.S. Bureau of Labor Statistics, CPI-U (all urban consumers), derived from July index values
Average 3.4%Last 10 2.5%Last 20 3.0%Last 30 4.6%
31
Impact of a Spouse’s Death
• Many married couples fail to plan for the eventuality that one spouse will die before the other.
• The consequences of not planning can have serious consequences, especially when the survivor is the wife.
32
Importance of Guaranteed Income for Spouse in Payout Decision
69%
22%
7%1%
65%
15%11%
5%
Very important Somewhatimportant
Not too important Not at allimportant
Married pre-retirees Married retirees
Source: SOA/Academy of Actuaries, 2003 Retirement Plan Preferences Survey
33
2001 Poverty Rates Among the Elderly
Poor(%)
Near Poor(%)
Married persons 4 4
Nonmarried men 14 9
Nonmarried women 18 10
Source: Munnell, Alicia H., “Why Are So Many Older Women Poor?,” Center for Retirement Research at Boston College, Just the Facts, No. 10, April 2004
34
What Questions Does This Raise?
• What can individuals be expected to do on their own?
• How much choice is desirable?
• How much can education help?
• How important are employer plans?
• How important is a safety net?
35
Where Should We Go Next?
• Advice to individuals?
• Advice to plan sponsors?
• Policy?