The alarm bells have long been sounding that many retirees are in for a rude shock when they find they didn’t save enough. A blog entry argues that information is a key to improving retirement savings and softening the blow.
In “Future Shock — Do Income Estimates Affect Saving Behavior?” LIMRA Secure Retirement Institute Corporate Vice President and Director of Retirement Research Matthew Drinkwater argues that there is a simple way to improve retirement savings — providing income estimates. “Motivating non-savers to become savers can be like asking a juggler to simultaneously tap dance, sing, and play the piano,” writes Drinkwater, asking, “But what about motivating savers to become better savers — that is, to save enough to provide for a secure retirement?”
Drinkwater argues that setting money aside for a long-term goal such as retirement can be challenging, and that left to their own devices, many people procrastinate about saving and hurt their chances to have a comfortable retirement. Employer-provided plans, automatic enrollment and auto-escalation have helped, he says, but Drinkwater suggests that there is more that can be done.
“What about motivating savers to become better savers — that is, to save enough to provide for a secure retirement?” he asks. One such motivation, he argues, is providing and promoting estimates of retirement income that show what a person’s hypothetical future income would be, based on saving levels and assumptions about investment returns, wage increases and asset allocation.
Drinkwater says that just over one-third — 34% — of workers have seen such estimates. The results? He reports that:
- 89% believe the information is at least somewhat accurate, and 44% believe it is very accurate;
- while most find that the information is what they expected to see, 25% are shocked because they expected the figure to be higher;
- 40% increase their savings rate; and
- estimates can boost workers’ confidence that they are saving enough — 41% of those who take action because of the information are more confident, and 57% of those who see the information and act on it are.
But Drinkwater also reports that retirement income estimates are a well-kept secret. “What’s interesting is that these future income estimates are ubiquitous,” he says. Virtually all major plan provider/recordkeepers offer them to participants. But only 4 in 10 people who save for retirement at the workplace say they saw any estimate in the past 6 months. Drinkwater argues that this suggests that promotion of retirement income estimates needs to be improved. Furthermore, he advocates making it possible for estimates to allow participants to see what effect adjusting their deferral rates would have.
Drinkwater also emphasizes how central employers’ role is. “The workplace remains the central hub of retirement savings, and the best place to direct efforts to improve saving behavior — especially among those who are already saving,” he writes.