4 August 2020

Retirement Age Disconnect

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When you’re young, retirement is a far-off, almost abstract concept. When you’re old, it’s more of an in-your-face reality. That explains the results of a recent survey of 401(k) investors that shows people ages 39 and younger expect to retire when they’re 62, while investors in their 60s put that number closer to 68 (and it’s even higher for septuagenarians, who in theory should be retired now).

Research and consulting firm Cerulli Associates surveyed 1,000 active 401(k) plan participants in this year’s second quarter to see what they plan to do with their 401(k) savings at retirement. We’ll get to those findings in a moment, but one of the overarching themes of the results was the disconnect between investors’ perception of their retirement readiness and the reality of their current financial situation.

Cerulli asked investors in six different age groups what their expected retirement age is. For people in their 20s, the average expected retirement age is 62.5. For those in their 30s, it’s 62.0. Folks in their 40s pegged the average number at 64.6, while those in their 50s put that figure at 65.4. Among the two oldest cohorts, people in their 60s chose an average age of 67.8, while those in their 70s expected that number to be 73.4. In short, Cerulli says, these numbers indicate older people approaching or at traditional retirement age are more realistic about their retirement prospects, while younger Americans are overly optimistic regarding their perceived ability to retire with a sufficient nest egg.

The concept of retirement is one of this country’s most fraught societal issues in the post-pension-plan era. We obsess about how to save for it, and then we fret about how to spend for it and whether we’ll have sufficient funds for our ever-lengthening life spans. Along those lines, Cerulli asked 401(k) plan participants ages 45 and older what they plan to do with their savings after they retire. One-quarter of respondents replied “I don’t know,” while another one-quarter said they “will ask my existing financial advisor for advice.”

“The latter data point can be read as a marginally more prepared version of ‘I don’t know,’ which, in sum, suggests that half of 401(k) plan participants have no idea what to do with the savings they have diligently set aside for retirement,” said Jessica Sclafani, director at Cerulli. The latter data point is also right up the alley for financial advisors, who get paid the big bucks to help guide their clients’ financial decisions.

In that vein, another 8.5% of respondents said they will hire a financial advisor to help decide how to handle their 401(k) savings.

As part of the overall survey, half of respondents confidently stated they’re prepared for retirement. In its report about this survey, The Cerulli Edge—U.S. Retirement Edition, 2Q 2018 Issue, Cerulli says it is “somewhat skeptical” about that claim because a little more than half of the 401(k) plan participants it surveyed contributed 6% or less of their salary to a 401(k) account. And another 13% contributed less than 8%.

Cerulli notes that financial advisors and consultants typically recommend that plan participants try to set aside at least 15% of their salary (including an employer contribution) into their 401(k). Based on its survey results, Cerulli concludes there’s a significant savings gap—if not a reality gap—among a large number of 401(k) plan investors regarding their retirement preparedness.

Click here for the original article from FA Mag.   

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