Retirement Security:Public Perceptions and

Misperceptions

2005 NASI Annual ConferenceJanuary 28, 2005

Discussion Leaders: Anna RappaportMathew GreenwaldRobert A. Rosenblatt

MATHEW GREENWALD & ASSOCIATES, INC.

2

Context

• Variety of studies show misinformation, but no prior source unified data

• SOA Committee on Post-Retirement Needs and Risks led 3-way partnership to:– Identify documented areas of misinformation

– Organize into unified paper

• Three partners: SOA, LIMRA, Mathew Greenwald & Associates

• 10 key issues identified• These should be considered together with

findings on behavioral finance

3

Savings Goals

• A majority have not tried to estimate how much money they will need for retirement.

• Many of those who have calculated this amount appear to underestimate how much money they will need to accumulate.

4

Savings Needed for Retirement

18%

8%

11% 11%

14%

3%

36%

41%

8%6%

8%

5%

0%

33%

16%

13% 13%

8%

13%

3%

35%

8%

3%

12%14%

20%

3%

39%

Less than$250,000

$250,000-$499,999

$500,000-$999,999

$1.00-$1.49million

$1.5 + million Could not docalculation

Don't know/Don't

remember

Total < $35,000 $35,000-$74,999 $75,000 +

Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey

5

Replacement Ratios

What People Need* What People Think They Need**

Pre-Retirement Income

Replacement Ratio (%)

Replacement Ratio

% of Workers

$20,000 89 Less than 50% 10

$40,000 80 50%–70% 28

$60,000 75 70%–85% 28

$80,000 77 85%–95% 11

$150,000 85 95%–105% 8

$200,000 88 105% or more 7

$250,000 88 Don’t know 7

*Source: AON Consulting/Georgia State University, 2004 Replacement Ratio Study

**Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey

6

Retirement Age and Working in Retirement

• The chances are high that some workers will retire before they expect to.

• Many workers expect to supplement their retirement income with earned income.

7

Timing of Retirement Among Retirees

36%39%

43%39%

37%

55%

49% 50% 50%52%

6% 6% 6% 6% 6%

2000 2001 2002 2003 2004

Earlier than planned About when planned Later than planned

Source: EBRI/ASEC/Greenwald, 2000-2004 Retirement Confidence Surveys

8

Working in Retirement

71%

29%

Workers planning to work forfinancial reasonsWorkers planning to work only fornon-financial reasons

65%61%

66%70% 68%

22%26% 24%

28%32%

2000 2001 2002 2003 2004

Workers planning to work for pay

Retirees who worked for pay

Source: EBRI/ASEC/Greenwald, 2004 Retirement Confidence Survey

9

Longevity Risk

• A confluence of trends is placing longevity risk squarely on the shoulders of retirees.

• Many people plan to live to life expectancy yet do not understand they could live much longer.

10

DB on the Decline:DB on the Decline:Percent of Workers Participating in a PlanPercent of Workers Participating in a Plan

0%

10%

20%

30%

40%

50%

60%

1989-1990

1990-1991

1991-1992

1993-1994

1994-1995

1995-1996

1996-1997

1997-1998

1999 2000 2003

Defined benefit Defined contribution

*InterpolatedFigures represent private industry only. Source: U.S. Department Of Labor, Bureau of Labor Statistics

*

11

Employer-Sponsored Retiree Health Employer-Sponsored Retiree Health Benefits DisappearingBenefits Disappearing

20%

30%

40%

50%

1992 1994 1996 1998 2000 2002 2004

Before age 65 Age 65+

% o

f la

rge

em

plo

ye

rs s

po

ns

ori

ng

Source: Mercer Human Resource Consulting

12

Survival of 65-year olds

0%

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105 110

Male Female

ex =

81

ex =

84

Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Mortality rates based on 1999 experience.

13

Probability Distribution of Deaths

0%

1%

2%

3%

4%

5%

65 70 75 80 85 90 95 100 105 110

Male Female

Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Mortality rates based on 1999 experience.

14

Life Expectancy at Age 65

15%

23%25%

7%

14%

7%8%

5%

13%

22%

7%

27%

18%

7%

<75 75-79 80 81-84 85 86+ DK/Ref

Males

Females

Source: Society of Actuaries, 2003 Risks and Process of Retirement Survey

15

Long-Term Care

• Many people underestimate their chances of needing long-term care.

• The percent of people owning long-term care insurance or that could self-insure an extended long-term care situation is low.

16

Why Don't You Own LTC Insurance?

67%

28%

21%

19%

16%

14%

9%

9%

9%

6%

54%

25%

17%

17%

29%

14%

11%

5%

5%

Too expensive

Don't need it

Medicare will pay

Have enough assets

Don't know enough

Medicaid will pay

Don't want to think about

Too complicated

Don't qualify

Not recommended

Retirees

Pre-retirees

Source: LIMRA International, 2002, Retirement Risks – How They Are Viewed and Managed

17

Lump Sums and Payout Annuities

• Guaranteed lifetime income has many positive effects

• A majority of people desire guaranteed lifetime income in retirement

• Retirement benefits increasingly available in lump sum form

• Election of lifetime income options is low.

18

36%

60%55%

41%

Guaranteed income sources will NOT be enough Interest in annuity concept

Retired

Not retired

Demand for Annuitization is SignificantDemand for Annuitization is Significant

Source: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets

19

Investment Returns

• Workers have more responsibility than before for managing investments for retirement.

• Many workers misunderstand investment returns and how investment vehicles work.

20

5-Year Average Annual Return

Anticipated 5-Year Average Annual Return

(mean %)

Stocks on the New York stock exchange 10.9

Bonds issued by large corporate entities 8.1

Money market funds 7.7

Stable value funds 7.6

Source: John Hancock, 2002 Defined Contribution Survey

21

Investment Risk

Average Rating of Investment Risk(5-point scale)

International/global stock funds 4.1

Domestic, diversified stock funds 3.6

Company stock 3.1

Money market fund 2.5

Domestic bond fund 2.4

Source: John Hancock, 2002 Defined Contribution Survey

22

Financial Planning Help

• A significant portion of retirees and pre-retirees do not seek the help of a “qualified professional.”

• There are no standards for “qualified professional.”

• Yet, there is strong desire to work with a financial professional.

23

Individuals Consulted for Rollover Decision – Retirees

42%

36%

24%

22%

16%

9%

14%

7%

5%

1%

1%

5%

2%

27%

25%

13%

10%

5%

3%

7%

2%

1%

0%

3%

1%

3%

Family/friend

Fin'l Planner

Inv. Advisor

Employer

Accountant

Banker

Full-service broker

MF Co. Rep.

Ins. Agent

Discount broker

Outplacement counselor

Lawyer

Other

Consulted

GreatestInfluence

Source: LIMRA International, 2002, Opportunities in the Pension Rollover Market – Employee Perspective

24

Advisors Used to Plan Retirement –Retirees

70%

63%

36%

35%

33%

24%

5%

65%

46%

30%

32%

27%

21%

5%

43%

24%

16%

14%

13%

12%

30%

Employer

Financial planner

Accountant

Stockbroker

Lawyer

Insurance agent

None of the above

Extensive

Some

Little/none

Source: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets

25

Self 22%

Employer 27%

Professional51%

Professionals preferred

overall, especially for

financial risks

DB plan income

recipients prefer employer-

sponsored planning

Base = Respondents with exclusive preference for one type of sponsorSource: LIMRA International, 2004, Retirement Planning – Activities, Advisors, and Risk ManagementNote: Respondents have at least $50,000 in investable financial assets

Exclusive Preference for Planning Sponsorship

26

Sources of Retirement Income

• Workers misunderstand what their primary sources of income will be in retirement.

27Source: EBRI/ASEC/Greenwald, 2003 Retirement Confidence Survey

Expected and Actual Major Sources of Retirement Income

31%29% 28%

26%23%

20%

12%

7% 6% 6%

11%

37%

13%

56%

17%

8%5% 3% 4%

9%

Workers Retirees

Pension Employeecontrib. toworkplace

ret. plan

Employercontrib. toworkplaceret. plan

SocialSecurit

y

Employ-ment

Othergovernment

programs

Supportfrom

children/other family

Otherpersonal savings

Sale of

business

Sale of

home

28

Process of Retirement

41%

32%

16%9%

71%

16%

7% 5%

Stop working all atonce

Continue to workfor pay part time or

periodically

Gradually reducethe number of

hours you workbefore stopping

completely

Continue to workfor pay full time

Pre-retirees Retirees

Source: SOA, 2003 Risks and Process of Retirement Survey

29

Inflation

• Inflation has become a fact of life that for most has been managed through pay increases.

• While many pre-retirees and retirees are concerned about inflation, few have adequate means of managing their incomes on an inflation-adjusted basis.

30

-15%

-10%

-5%

0%

5%

10%

15%

20%

1944 1954 1964 1974 1984 1994 2004

Inflation Facts – Last 60 years

Source: U.S. Bureau of Labor Statistics, CPI-U (all urban consumers), derived from July index values

Average 3.4%Last 10 2.5%Last 20 3.0%Last 30 4.6%

31

Impact of a Spouse’s Death

• Many married couples fail to plan for the eventuality that one spouse will die before the other.

• The consequences of not planning can have serious consequences, especially when the survivor is the wife.

32

Importance of Guaranteed Income for Spouse in Payout Decision

69%

22%

7%1%

65%

15%11%

5%

Very important Somewhatimportant

Not too important Not at allimportant

Married pre-retirees Married retirees

Source: SOA/Academy of Actuaries, 2003 Retirement Plan Preferences Survey

33

2001 Poverty Rates Among the Elderly

Poor(%)

Near Poor(%)

Married persons 4 4

Nonmarried men 14 9

Nonmarried women 18 10

Source: Munnell, Alicia H., “Why Are So Many Older Women Poor?,” Center for Retirement Research at Boston College, Just the Facts, No. 10, April 2004

34

What Questions Does This Raise?

• What can individuals be expected to do on their own?

• How much choice is desirable?

• How much can education help?

• How important are employer plans?

• How important is a safety net?

35

Where Should We Go Next?

• Advice to individuals?

• Advice to plan sponsors?

• Policy?