by Putnam Investments
A landmark study of new retirees reveals a money-worried, cash-strapped group, dependent on Social Security. Still, that hasn't stopped them from being satisfied, showing there's more to happiness than money.
The survey of 2,000 people retired within the past two to six years was sponsored by Putnam Investments. "We wanted to know what the life change from full-time career to retirement was like emotionally and financially, so we asked the group with the freshest experience. A record number of Americans, approximately 75 million, will make this transition over the next two decades," explained Richard A. Monaghan, head of Putnam Retail Management.
Recent retirees in the study have an average household income of $49,000. Median household income is lower: $34,000. The group is almost evenly split between those living better than in their working years and those living on less. About one in five are "struggling" financially.
Most respondents are worried about finances and the stability of government-funded programs. Forty-one percent are very concerned they'll outlive their money. Despite these financial worries, 84 percent of new retirees say they're "satisfied" with their new life status. Satisfaction increases, however, as retirement income climbs.
The surveyed group is the first generation of workers straddling both traditional (defined benefit) retirement plans and self-directed 401(k) retirement plans, introduced in 1981. Traditional pensions provide 24 percent of their retirement income; income from self-directed retirement plans, as well as other investments and savings, accounts for 11 percent. Social Security is by far the most important financial resource, representing 41 percent of income.
A separate study of full-time employees conducted for Putnam Investments earlier this year shows current workers expect their own savings to provide 47 percent of retirement income and Social Security to provide only 21 percent. "People working today expect to retire on their own savings first and use Social Security for a back-up if it's still there," noted Monaghan, "but recent retirees are telling today's workers they may be headed for a major disappointment if they haven't been effective savers and investors."
Starting in the late 1980s, the number of 401(k) plans has grown substantially, while the number of traditional pension plans has diminished. Social Security remains an uncertainty for future generations. "No one knows how these shifting sources of retirement funding will affect the next generation of Americans who will be leaving the workforce after taking over responsibility for their own retirement savings," said Monaghan.
Planning, Advice, and Withdrawal
Only 16 percent of recent retirees had a formal, written financial plan although the number using professional financial advisors rises dramatically with assets. Fifty-four percent of those with net worth over $500,000 have used an advisor, while only 16 percent of those with $150,000 or less have done so. A fifth of respondents have a systematic withdrawal plan of their investable assets, and on average, they take out about 6.7 percent a year. At that rate of withdrawal, a retiree's assets will be depleted in about 17 years, assuming a portfolio of 40 percent stocks, 50 percent bonds, and 10 percent cash at historic rates of return.
Health, Wealth and Worry
There is a clear correlation between income and health. People in the study who say their health is poor have an average household income of only $28,000, while people who claim their health is excellent have an average household income of $65,000. More than three-quarters of recent retirees say they don't have private insurance for home or nursing-home care, creating implications for future government funding of health care. In terms of worry, men are more worried about the health of their spouse than women are. Women worry more than men about almost everything else.
What They Want
Contrary to the common image of carefree retirees traveling, studying, and volunteering, their most important goals are having a secure retirement income and not worrying too much about money. Spending more time with family members places a distant fourth followed by traveling and hobbies. Recent retirees are not particularly interested in going back to school to learn something new. But 27 percent of recent retirees would rather be at their old job than retired.
The money theme carries through on recent retirees' biggest regrets. Seventy percent wish they'd saved more and 59 percent wish they'd started saving earlier. Their biggest surprise? That they have insufficient income and high expenses. More than one-third wish their former employer or retirement plan provider had done more to encourage them to save sooner and faster.
"The findings of this study—the first to look at both emotional and financial attitudes of retirees—have major implications for the relationship between individuals and financial institutions," said Dr. Richard Geist, clinical instructor in the Department of Psychiatry at Harvard Medical School, president of the Institute of Psychology and Investing, and consultant to Putnam for the study. "The most important finding of the study is that advice to save early and save more has not been heeded by the vast majority of retirees. As a result, we need to develop new, creative ways to help younger workers talk about and learn about money in a manner that leads to maximizing their long-term financial strategies."
In conclusion, Monaghan said, "As a group, recent retirees are worried about money and health care, often living at a lower standard, and depending in large part on Social Security. Nevertheless, our study speaks to their adaptability. They have modest goals, and they're adjusting favorably to a lifestyle that reflects their financial resources. Nevertheless, the message to those who are still working is 'save early, save more, and get a financial advisor.'"