By Randy Myers
Creating a financially secure retirement can be a big challenge. It appears to get even harder if you don’t plan for it.
A new survey from Goldman Sachs Asset Management shows that people who have planned for their retirement have higher levels of retirement savings than those who haven’t planned, on average, and are significantly more likely to be on track to reach their savings goals. They’re also more confident in their ability to reach their goals, more comfortable managing retirement savings, and more likely to have increased how much they’re saving for retirement in the past year.
The Survey of Consumer Finances polled 3,280 working individuals and 1,594 retirees between June 27 and July 21. Among those survey respondents who were already retired, 74% who were planners said they’re satisfied with their level of retirement income versus just 43% of the non-planners.
Based on statistical analysis of the survey data, having a personalized plan for retirement was the second most important factor in explaining higher retirement savings levels, second only to education level.
“When we look at (these results), it’s striking how impactful planning was,” said Chris Ceder, senior retirement strategist in the Asset Management Division at Goldman Sachs Asset Management, in presenting the survey results at the Stable Value Investment Association’s 2024 Fall Forum in Washington, D.C.
For purposes of the survey, planners were defined not as someone who had worked with a professional financial planner, necessarily, but rather someone who had calculated how much they needed to save for retirement and planned for how they would save and invest to reach their goals.
While conceding that it’s hard to show a causal relationship between planning and retirement outcomes, Ceder said the survey shows “significantly better (outcomes) for people who are taking these planning actions.”
While people with lower incomes often don’t have sufficient assets to work with a financial planner, Ceder noted that participation in an employer-sponsored retirement plan can make it easier to access financial planning advice, since retirement plans often include that feature. Employer-sponsored plans, Ceder said, democratize access to planning and other important services.
Nonetheless, access to an employer-sponsored retirement plan doesn’t necessarily ensure retirement success. Data from the survey showed that while median retirement savings levels have grown dramatically over the past three decades for savers in the top 20% income bracket, those in the bottom 80%, and especially those in the bottom 60%, have seen much more limited growth.
Workers, especially lower income workers, can struggle to save for retirement because they’re faced with competing priorities for their limited earnings, the survey indicated. Those competing priorities can include housing, medical care, childcare, college tuition, and hospital services, all of which have grown faster than the rate of inflation over the past 24 years. Sixty-one percent of the working survey respondents said they expect to have to delay their retirement due to competing priorities for their money.
Workers also can fall short of their retirement savings goals when they are forced to retire sooner than expected, perhaps due to job loss or health issues, or when they temporarily leave the workforce to care for children or an older family member. The tenuous financial status of many American workers can be seen in how they manage credit card debt. Among working survey respondents, 39% said they pay the minimum or less on their credit card balances each month. Sixty-two percent say they have less than three months of emergency savings.
While the retirement industry should continue to make it easier for Americans to plan for retirement, Ceder suggested the industry might also improve workers’ chances of reaching their goals if it can find a way to drive higher returns in their retirement portfolios. Offering personalized, professional managed portfolios could be one option for doing that. Another could be to enhance a plan’s investment menu with investment options offering higher risk and return profiles given the long-time horizon being addressed—something that’s routinely discussed for defined benefit plans, Ceder said, but almost never for defined contribution plans.
To see what impact better-performing investment options might have, Goldman Sachs Asset Management looked at expected returns for a hypothetical portfolio with 60% of its assets allocated to publicly traded equities and 40% to publicly traded fixed income. It then compared that to a portfolio with 50% of its assets in public equity, 35% in public fixed income, and 15% in a mix of private equity, private fixed income and private real estate. The latter portfolio had an expected return 52 basis points higher than that of the all-public portfolio, with only modest increases in volatility and Sharpe ratio. Further analysis by Goldman illustrated that an additional 50 basis points of return over the course of a career may reduce by 150 basis points the amount an individual needs to save for retirement each year, as a percentage of their income, and so help them with balancing competing saving priorities.
Ceder said he’s already seen instances of large plan sponsors putting private credit and private equity into their 401(k) plans.
“People want to save more for retirement, that’s clear,” Ceder said. “We need to help them figure out how to do that. We also need to think about what we are doing (on) the investment side … to enhance returns.”
