Financial pressures may delay retirement, survey on preparedness reveals

A range of financial stress and pressures that can impede retirement savings – the so-called financial vortex – encompasses high monthly expenses, frequent financial hardships and the rising costs of caring for family members. While the survey noted a slight decline in the impact of these competing priorities compared to previous years, more than 60% of working respondents still believe they will need to delay their retirement due to these demands.

This persistent concern underscores the need for a holistic approach to retirement planning that considers not just savings and investments, but also strategies for managing day-to-day expenses and unexpected financial burdens. As Michael Finke, professor of wealth management at The American College of Financial Services, notes: "Retirement planning isn't just about accumulating assets. It's about creating a comprehensive strategy that can withstand the various financial pressures individuals face throughout their lives."

One of the most significant findings from the survey is the positive impact of having a personalized retirement plan. Working individuals with such a plan reported:

• More confidence in reaching their retirement goals.
• Less stress in managing their savings.
• A lower likelihood of delaying retirement due to competing priorities.
• A higher likelihood of increasing year-over-year savings.

These benefits extend into retirement as well. Retirees who had a plan when preparing for retirement were more likely to report higher retirement savings, better lifestyles in retirement and less stress entering retirement. They were also less likely to work part-time in retirement due to insufficient savings.

Market volatility remains a significant concern for many retirement savers, particularly those nearing or in retirement. The unpredictable nature of financial markets can pose a serious threat to retirement savings, potentially derailing carefully laid plans and causing significant stress for retirees. The survey highlights the critical importance of developing robust strategies to mitigate this risk, ensuring that retirees can maintain their lifestyle and financial security regardless of market conditions.

One approach gaining traction is the use of guaranteed income products, such as annuities, to provide a stable income stream regardless of market fluctuations. These products can offer retirees peace of mind by ensuring a consistent cash flow to cover essential expenses.

According to Wade Pfau, professor of retirement income at The American College of Financial Services, "Incorporating guaranteed income sources into a retirement plan can help retirees weather market downturns without having to sell assets at depressed prices. This can significantly enhance the sustainability of a retirement income strategy." By creating a foundation of guaranteed income, retirees can potentially take a more aggressive approach with their remaining assets, knowing that their basic needs are covered.

While annuities and guaranteed income products are key tools in a comprehensive strategy to protect retirement savings from market volatility, other strategies to consider include:

• Diversifying investments across different asset classes.
• Maintaining an appropriate asset allocation based on risk tolerance and time horizon.
• Considering a bucket strategy that segments assets based on when they'll be needed in retirement.

Financial education plays a crucial and multifaceted role in retirement planning, serving as the foundation for informed decision-making and long-term financial security. The survey results highlight a significant gap between perceived and actual financial knowledge, underscoring the critical need for enhanced financial education initiatives.

The discrepancy between self-perception and reality in financial literacy is alarming. While nearly half (48%) of working respondents believed they possessed the knowledge to manage their savings effectively, only a fifth (20%) could correctly answer all five basic financial literacy questions. This gap reveals a dangerous overconfidence that could lead to poor financial decisions and inadequate retirement preparation.

Financial education's importance in retirement planning extends far beyond basic literacy. It encompasses a range of knowledge areas crucial for effective retirement planning:

• Understanding of investment principles. Proper financial education helps individuals grasp concepts like diversification, risk tolerance and the power of compound interest. This knowledge is essential for making informed decisions about portfolio allocation and investment strategies.
• Awareness of retirement account options. Education about different types of retirement accounts – 401(k)s, IRAs, Roth accounts – and their respective tax implications enables individuals to choose the most suitable savings vehicles for their circumstances.
• Grasp of Social Security benefits. Understanding how Social Security works, including factors that affect benefit amounts and optimal claiming strategies, is crucial for maximizing this important retirement income source.
• Comprehension of health care costs. Financial education should cover the potential health care expenses in retirement, including Medicare coverage and limitations and the importance of planning for long-term care needs.
• Budgeting and cash flow management. Education on creating and sticking to a budget is vital for both the accumulation phase (saving for retirement) and the distribution phase (managing income in retirement).
• Awareness of fraud and financial scams. As retirees are often targets for financial fraud, education on recognizing and avoiding scams is crucial for protecting hard-earned savings.
• Understanding of estate planning. Basic knowledge of wills, trusts and other estate planning tools helps ensure that retirees can effectively pass on their assets according to their wishes.

The benefits of improved financial education in retirement planning are numerous:

• Increased saving rates. When people understand the importance of saving and the power of compound interest, they're more likely to save adequately for retirement.
• Better investment decisions. Educated individuals are less likely to make emotional investment decisions based on market fluctuations and more likely to maintain a long-term perspective.
• Improved risk management. Understanding different types of risk (market risk, longevity risk, inflation risk) allows for more comprehensive retirement planning.
• Enhanced confidence. Genuine financial knowledge, as opposed to false confidence, can reduce anxiety about retirement and lead to more proactive planning.
• Better utilization of professional advice. Financially educated individuals are better equipped to seek out and effectively use professional financial advice when needed.

The survey reveals a strong demand among working respondents for additional retirement benefits and solutions from their employers. Retirement savings and investing advice topped the list of desired services, consistently valued across all investor types.

Employers can enhance their retirement planning support by:

• Incorporating personalized planning services into their retirement plan offerings.
• Providing access to financial professionals or coaches.
• Offering educational resources on retirement planning and financial literacy.
• Implementing features like emergency savings accounts and student loan repayment assistance.

The Goldman Sachs study introduces the concept of "financial grit" – a set of behaviors and attitudes that can help individuals overcome financial obstacles throughout their lives. Retirement savers with financial grit demonstrated higher savings, better progress toward their goals and more engagement with their finances. Developing a retirement mindset involves:

• Setting clear, long-term financial goals.
• Regularly reviewing and adjusting retirement plans.
• Being willing to make short-term sacrifices for long-term financial security.
• Seeking out financial education and professional advice when needed.

The survey provides valuable insights into the status of retirement planning in America. It highlights the importance of personalized planning, financial education and a holistic approach to retirement income strategies. By addressing the challenges posed by the so-called financial vortex and market volatility, and by fostering a retirement mindset, individuals can work toward a more secure financial future. As retirement planning continues to evolve, it's clear that a one-size-fits-all approach is not sufficient. Instead, a personalized, comprehensive strategy that considers all aspects of an individual's financial life is essential for dealing with the complexities of modern retirement planning.