- 78% of investors expect their standard of living in retirement to be the same or better than it is now
- 80% believe they have planned for the future and are confident they will have a secure retirement
…and once again are depending on strong stock returns to fund these retirement dreams
- Nearly half of investors (48%) continue to rely on equities as the foundation of their retirement portfolios
- 74% say it is likely the stock market “will bounce back and restore” any portfolio losses
- Overall, respondents believe a 9% annual mean return is a reasonable expectation for retirement planning
Investors counting on a “healthy” retirement
- 77% of all respondents expect to have “better than average health” throughout retirement
- 61% have never accounted for health care costs in their retirement planning
Investors admit they don’t know enough and are looking to advisors for help
- 72% want to know more about generating sustainable retirement income
- More than half (55%) agree that it’s more important than ever to work with a financial advisor
Despite the most tumultuous year for investors since the Great Depression, Americans appear unfazed and continue to have high hopes for retirement, according to the results of research released by Allianz Global Investors, a leading global investment management firm. But they may need a more realistic approach to retirement planning and investing if their expectations are to be met.
A key finding of the survey is that as stocks have regained their vigor, so has typical American optimism. Although investors say they lost an average 30% of their retirement savings at the bottom, they are nonetheless overwhelmingly positive about the outlook for their retirements. A large majority (71%) of those surveyed believe the situation will turn around and they will have a great retirement. And nearly 80% say they are at least somewhat confident they’ll have the money they need when they want to retire. Furthermore, more than 60% believe that the market dislocation is a “temporary downturn and things will eventually go back to normal.” This refusal to learn from the experience may lead to problems down the line.
“Despite this refreshing optimism, tremendous damage has been done and Americans now have a lot less accumulated for retirement than they did even a few short years ago,” said Brian Gaffney, CEO of Allianz Global Investors Distributors. “Our survey reveals a need for all of us to honestly reassess our vision of retirement and to develop realistic and sustainable retirement savings models. It’s important that we take to heart the lessons learned during this financial crisis and make small changes now to improve our likelihood for a secure retirement in the future.”
The survey was conducted online by Harris Interactive within the United States between July 27 and August 10, 2009, among a nationwide cross section of 1,013 pre-retired household financial decision makers aged 30 or older with at least $250,000 in investable assets. Respondents for this survey were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the composition of the U.S. adult population. Because the sample is based on those who agreed to participate in the Harris Interactive panel, no estimates of theoretical sampling error can be calculated.
One Year Later: Lesson (Not) Learned #1 – Stock Market Turnaround to Fund My Retirement Dreams
Despite their “up-close” encounters with market volatility, investors remain confident that the equity markets will soon get back to normal, providing them with the money they need to retire as planned – and this confidence may be keeping them from taking necessary steps to meet their goals.
Nearly half of all investors surveyed (48%) are relying on stocks as the foundation of their retirement portfolios, and approximately four in ten Baby Boomers (43%) and mature Americans (40%) who are quickly approaching retirement say that the stock market is the foundation of their portfolios. Surprisingly, 21% of mature investors – who are primarily over 65 years old – say they have 91-100% of their employer-sponsored plans invested in stocks.
“The traditional approach to retirement planning that is heavily weighted to stocks may expose investors to increased volatility, making it potentially more difficult to cover basic spending,” said Mr. Gaffney. “Investors need to establish a floor for minimum, ‘must-have’ retirement expenses, and then anchor that part of their portfolios with a conservative strategy designed to prevent irrecoverable losses. That will increase the likelihood of enjoying the full benefit of other investments for their ‘want-to-haves.’ Without that anchor, however, baseline needs like day-to-day expenses and healthcare may be at risk.”
Given this reliance primarily on equities to fund their retirement dreams, it’s no surprise that investors’ high hopes are underpinned by some optimistic assumptions about the equity markets. According to the survey, investors are counting on a rebound: 74% think it’s likely that the “stock market will bounce back and restore any losses” in their portfolios.
One Year Later: Lesson (Not) Learned #2 – Reversion to the Same Old Mean
Human behavior is hard to change. Despite massive declines in wealth over the past year, investors continue to rely on conventional investment and retirement planning assumptions. The mean expected average annual rate of return investors use in planning for retirement is 9% and a large majority (81%) is confident they’ll get their expected rate of return with their current asset allocation.
Investors continue to hold fast to conventional wisdom about retirement planning. Seventy percent believe that “buy and hold” is the path to success and more than half (56%) say that historical performance is a reliable predictor of future success. Despite the failure of many traditional strategies to withstand the crisis, nearly half of investors (48%) think that a 60/40 stock-to-bond split is the model portfolio allocation.
“While it’s highly unusual for all major asset classes to fall at once, severe tail events – those improbable events that cause significant adverse portfolio effects – occur more frequently than many people realize,” said Mr. Gaffney. “We believe that now is the time, while the downturn is still front of mind, for investors to take a closer look at their asset allocation and to consider alternative assets like commodities and Treasury Inflation-Protected Securities or TIPS that, unlike stocks and bonds, positively correlate with inflation and help lower overall portfolio risk.”
One Year Later: Lesson (Not) Learned #3 – Inflation Is Not a Risk, and Cash and Stocks Protect Against That, Anyway
Whatever fears investors have about meeting their retirement goals are tied closely to market performance, with investors ranking the financial markets as the biggest threat to a secure retirement. Indeed, they identify the impact of the economic crisis as an area they should know more about.
The threat of inflation, however, is much lower on the list of concerns for investors. Only 9% of investors rank inflation as the #1 factor threatening their retirement and perhaps more significant, there is an apparent lack of understanding about this risk on the part of investors. In fact, while 73% of investors say they factor inflation into their retirement planning, 45% of those surveyed couldn’t even venture a guess about an inflation rate for planning purposes.
Eighty percent of investors report taking actions to protect their portfolios against inflation, with saving more money being the number one action (43%), followed closely by investing in stocks or stock funds (39%). The vast majority of investors have overlooked “real return” assets like commodities and TIPS, which are only used in 12% and 9% of retirement portfolios, respectively.
“Inflation may be the single biggest risk to sustaining a reasonable lifestyle in retirement,” said Mr. Gaffney. “While there is a widespread belief that stocks are an adequate hedge against inflation, that has not always been the case. We believe the best way to protect against unexpected upticks in inflation is by maintaining exposure to real return assets such as TIPS, real estate and commodities.”
One Year Later: Lesson (Not) Learned #4 – Saving for a “Healthy” Retirement
With health care reform dominating the dialogue in Washington, it is more important than ever for investors to factor these costs into their retirement plans. However, the survey reveals that investors haven’t fully considered the impact of health care costs on their retirements. While 64% of investors say covering health care costs is a “must-have” in their retirement vision, 61% have never accounted for them in their retirement planning – including 62% of Baby Boomers who are on the fringe of retirement. Defying statistical possibility, a large majority ― 77% — of all respondents expect to have “better than average health” throughout retirement.
“It’s tough to confront the possibility of deteriorating health, let alone how to pay for it,” Mr. Gaffney said. “But reform notwithstanding, health care costs are likely to remain considerable for most retirees, as Americans enjoy ever longer and more active retirements. Ignoring these expenses in a retirement plan is like buying a beach house without storm insurance. Eventually, you’re probably going to take a hit, and the consequences might be devastating.”
And…One Year Later: Lesson LEARNED #1 – Investors Want to Learn More, Value Professional Help
Encouragingly, despite their high level of confidence and general optimism, investors want to learn more about a wide variety of issues related to retirement planning and are looking to financial advisors for help.
Seventy-two percent would like to learn more about the best ways to generate income in retirement, 71% said they should know more about anticipating health care costs in retirement, and 62% want help ensuring they don’t outlive their assets. Overall, more than half (55%) agree that it’s more important than ever to work with a financial advisor.
“We believe that there is a historic opportunity for advisors to focus their clients on a more realistic retirement vision and a more practical path to achieving it,” said Mr. Gaffney. “The good news is that when it comes to some of the overarching issues that will impact their retirement security, investors want to learn more and are looking to advisors for help. Estimating health care costs and generating lifetime income are complex issues, so it’s not surprising that even relatively successful investors are seeking professional guidance.”
