Surprise: Retirement is Better than Expected
Well, here's some good news: Many baby boomers who retired within the last five years are surprisingly satisfied.
A new national survey by T. Rowe Price shows that many recent retirees who have 401(k)s and/or rollover IRAs have created substantial nest eggs and report they are both financially and emotionally sound.
The research for the Baltimore-based money manager targeted 1,500 individuals who have one or more work-related retirement accounts such as a 401(k), IRA and the like.
Because of access to workplace savings plans, this is a relatively wealthy subset of the baby boomer generation, with median net assets of almost $500,000 (investable assets plus real estate minus debt).
Still, there was wide divergence.
The key differentiator is marital status. Compared to singles, married couples tend to be both more satisfied with retirement in general and more financially secure. The latter is not surprising considering the high workforce participation of baby boomer women, many of whom also had the opportunity to participate in a 401(k) plan. Nearly half of married couples reported having $500,000-$2.5 million in assets; 52% of singles had net assets of between $50,000-500,000.
As senior manager Anne Coveny, points out, boomers are the first generation to have access to defined contribution (DC) plans for most of their careers. Unlike the pensions their parents may have received, employees with DC plans are required to make contributions as well as decide how their accounts are invested. Instead of receiving a fixed amount of income for life, those who retire with defined contribution plans must continue to manage their asset allocation as well as determine how much income they can safely withdraw. Many experts have expressed concern that most are not up to the task.
As the leading edge of this generation moves into their mid-60s, “they’re just starting to depend on defined contribution assets for their retirement income,” says Coveny. “We wanted to know how they are managing [their finances] early into retirement.”
The answer? So far, so good.
Ninety percent of these recently-retired households say they are very or somewhat satisfied with retirement.
Although boomers have been type-cast as avid consumers, on average, this group is having no problem existing on one-third less income than when they were working. What's more, 85% agree that “I don’t need to spend as much as I did before I retired to be satisfied.” In fact, nearly 60% say they are living as well or better.
Coveny takes this as an encouraging sign. “This group has an average of 2.8 years in retirement and they have adjusted very quickly.”
Even among these relatively-wealthy retirees, Social Security represents the largest single source of their retirement income, averaging 43% of the total. “Social Security is crucial to people,” says Coveny. Traditional defined benefit (pension) income is the second-biggest source 19%. The rest comes from retirement accounts, personal savings and work. Yes, work. Though retired from a primary career, one-in-five new “retirees” is working full or part-time.
Minding Their Savings
They are also being careful about drawing down their retirement assets. The median annual withdrawal was 4%- in line with what financial advisors often recommend. Still, 29% withdrew just 1% or less. “They’re thinking, ‘This balance has to last a long time,’” says Coveny.
Significantly, 60% say they prefer to reduce their income to adjust for swings in the financial markets rather than continue to withdraw a fixed amount from their retirement account. In other words, this new crop of retirees understands they need to be flexible in order to preserve their assets.
"They would rather dynamically manage their spending to preserve their account balance than maintain a constant income. This is different for this generation. Older generations were probably more interested in having a steady income," Coveny says.
Younger and Warier
In addition to recent retirees, the T. Rowe Price survey also polled one thousand pre-retirees, age 50 and up, to get a sense of how confident they are about entering retirement. Possibly because the unknown is always a bit scary, this group is decidedly more worried about how they will fare financially. They are more likely to expect that they will have to reduce their standard of living and will struggle to cover healthcare expenses.
On average, this group intends to work until age 68. Eighty percent will delay taking Social Security until they are at least full retirement age and eligible for 100% of their benefit. A third plan to wait until age 70 when, thanks to delayed retirement credits, their benefit will be at least 32% larger. (Just one-in-five will start as soon as possible at age 62.)
All in all, this survey is a strong testament to the value of workplace retirement plans such as 401(k)s. It shows that individuals are willing and able to save for their own retirement if provided a way to easily and automatically contribute to a savings plan. And that the education that employers and investment firms provide participants- about contributing regularly, investing in a diversified manner, thinking long-term and being cautious when taking withdrawals- does sink in. “Helping people save in 401(k)s feels like the right thing to do,” says Coveny.
Still, these newly-hatched retirees are exactly that--relatively young and several years away from the age when serious health issues begin to develop. It would be interesting and insightful to check in with them 10 years from now to see how they’re faring.