Americans expect to replace their salaries with retirement income. They just can’t figure out how much they’ll need or how they’ll ensure the money lasts through retirement, according to 1,014 respondents to a survey commissioned by JP Morgan Retirement Plan Services. Only 40% are confident they’ll reach their financial goals by retirement. But most troubling, less than a third of respondents have enough savings to comprise their replacement income, an amount recommended to be at least 70% of earned income.
The survey, conducted by Harris Interactive for Morgan during July 2010, was limited to US residents 21 or older, working either full time or part time for companies with at least 50 employees, and who have made at least one contribution to their 401(k) plan in the past year. The self-employed were not included.
Two-thirds of respondents said they didn’t know how much they need to save for retirement. Nearly half fear outliving their savings and only 40% are confident of reaching financial goals. While 91% agreed that they are personally responsible for their own financial futures, 80% of high income employees are doing their own research, with only 30% seeking financial planning advice.
Most surprising is that higher-income employees are facing the most challenging short falls. Those earning $165,000 a year are more threatened, because due to current market returns “they cannot replace their salaries in time with their 401(k) contributions alone,” Diane Gallagher, vice president for product development, tells Institutional Investor. With the IRS limiting annual 401(k) contributions to $16,500 and one-time catch up payments to $5,000, “they can’t make up the shortfall,” she says. “It’s not enough to say, ‘Save, save, save,’” plan sponsors have to “step up,” she says, by calling employees’ attention to the amounts in their own portfolios and providing a full picture.
If they’re making $200,000 a year and will only have enough saved for $60,000 a year to live on, they have to consider supplemental savings channels right away, says Gallagher. The forecast assessments are provided to JP Morgan by Financial Engines, an independent investment advisor on retirement issues, co-founded in 1996 by Nobel Prize-winning economist Bill Sharpe. FE’s site, www.financialengines.com , provides calculators for figuring retirement income tailored to fit each visitor’s financial situation.
Automatic savings and accelerated savings programs are effective, says Gallagher, but need to take the decision making away from the saver. For the high income earners she proposes that employers suggest additional savings plans distinct from the Defined Contribution plan, such as non-qualified retirement plans or executive bonus plans, which can be worked out with the employer. It’s important, says Gallagher, for plan sponsors to “provide context around an employee’s account” rather than just provide literature, which 69%, the survey found, don’t read.
