Retirement Confidence Drops as Workers Get a Reality Check

It was no surprise that, during the recession, Americans’ confidence in their ability to retire slipped. But now, just as the economy is starting to recover, it may surprise some that workers are more pessimistic about their ability to retire than at any other time in the past two decades.

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More than a quarter (27 percent) of workers said they are now “not at all confident” about retirement, up five percentage points from a year ago, according to the annual retirement-confidence survey from the Employee Benefit Research Institute. On the flip side, 13 percent of respondents said they were “very confident” of a comfortable retirement, the lowest level on record.

Jack VanDerhei, EBRI research director and co-author of the report, said he’s actually taking this drop in confidence as a positive sign.

“We have been doing this for 21 years and the underlying theme is that there is a tremendous amount of false optimism” when it comes to retirement, VanDerhei said.

Confidence among people who are prepared for retirement didn’t change from last year to this year — their confidence was rattled by the stock-market drop in 2008 and 2009. But what’s different, VanDerhei said, is that the unprepared have started to worry.

“Finally, the people who were not well prepared are waking up enough to know it,” VanDerhei said. “A lot of individuals had a situation where they could no longer psychologically ignore the situation. They were forced to sit down and do some kind of real assessment — and they were quite shocked about how off track they really were.”

What remains shocking, VanDerhei said, is that this group hasn’t started ramping up their savings as a result of this wake-up call. He hopes next year’s survey will show that they finally started to do something about it and there will be an increase in respondents who have saved as well as the overall amount saved.

Some of this may be that people watched their parents have a comfortable retirement and think that their's will be, too. What they’re failing to realize, VanDerhei said, is that their parents probably had defined-benefit plans and retiree-health plans, he said, both of which companies are starting to dump. So, not only do you need as much as your parents did, you need more to cover those big added expenses.

Jerry Lynch, a certified financial planner in Fairfield, NJ, said his clients are prepared but now even they are paying closer attention to their retirement plan.

“People are actually looking at their statements and trying to see how realistic their retirement plans were,” he said. “Generally, the assumptions they used before were totally unrealistic (rates of return, draw-down rates, etc.),” he said.

More than a third of respondents in the EBRI survey said they had to dip in to their savings in the past year to pay for basic expenses and 42 percent said they determined how much the need to save for retirement by guessing.

More than four in 10 said they’ve used a retirement calculator but the math remains fuzzy for most: More than half of the workers surveyed said they’re saving for retirement but of that group, more than half said they had less than $25,000 saved. And a third of all workers surveyed said they thought they’d need less than $250,000 for a comfortable retirement.

Fear is a powerful motivator and Lynch said even though his clients have saved enough and are in good shape, the events of the past few years have scared them into saving more.

“I am constantly amazed by the amount of people making great incomes that are literally broke if they do not get one paycheck,” Lynch said. Finally, “people are starting to realize that they need to save more. They are getting a better understanding of the risk and volatility associated with the stock market and they need to have a ‘Plan B’ when something goes wrong.”

Clients used to balk when he suggested a moderate or conservative portfolio, now Lynch said, they’re OK with being conservative.

Stacy Francis, a certified financial planner and founder of Savvy Ladies, a financial-education group for women, said her clients are going so far as to ask to not have their retirement income increased.

“Clients are less confident in their ability to retire,” Francis said. “Clients are asking us to not increase their income when we project their salary in the future. Some are even wary of even increasing their income at inflation.”

Some, however, don’t have a choice. A significant number of workers are being forced to retire earlier than planned due to layoffs or medical conditions. Nearly half (45 percent) of respondents in the EBRI said they were pushed into early retirement.

Not surprisingly, many workers said they’re delaying retirement.

“Many people are planning to work longer and retire later because they know they simply can’t afford to leave the workplace — both for the paycheck and for the benefits,” said Matthew Greenwald, the owner of Greenwald & Associatesand co-author of the EBRI survey.

“I have many clients, who, in 2007, planned on retiring in 2010 or 2011, but are delaying it for several more years — mainly because they are having to save more and to give their accounts more time to recover,” said Greg Womack, a certified financial planner in Edmond, Oklahoma.

One thing they’re not delaying any longer — divorce.

“The economic stress of the past several years has taken its toll,” Francis said. “We have had a record number of new clients asking us to model what their finances will look like post-divorce.”

This drop in confidence when it comes to retirement will likely continue, Francis said.

“We are not done with the fear,” she said. “The Dow took a tumble last Thursday and this greatly spooked clients. The increasing international turbulence, high gas prices, increasing national debt and slow real estate recovery is weighing on the minds of clients.”

VanDerhei said in particular, he thinks confidence among those who are unprepared for retirement still has farther to fall.

“There’s a huge percentage of people who have less than $1,000 or $2,500 saved. They don’t have a defined benefit plan and they’re in their 40s or late 30s. I think there is a huge amount of awakening for some of these individuals that’s still left to go,” VanDerhei said.

Here’s an awakening statistic: More than 40 percent of low-income Americans are expected to run out of money within 10 years of their retirement, according to projections from the EBRI.

The most important thing for anyone, VanDerhei said, is to know — not guess — how much you will need to live off of in retirement before you retire.

“It’s so much easier, if you’re 65, to work another year or two or three, than it is to get to 70 or 75 and find out you don’t have enough money and then try to get back into the work force at that point,” VanDerhei said.

The problem for many Boomers is that they didn’t start saving for retirement until after they were 30. And, while many people got a wake-up call in the past two years, it apparently didn’t ring in Gen Y’s apartment: 60 percent of Gen Yers said they’ve saved nothing for retirement and 40 percent said they plan to save nothing again this year, according to Scottrade’s annual retirement survey.

Does anyone know how to turn the ringer up on this thing?

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