Much like food trucks and artisanal cheese, this term has been popping up seemingly everywhere. It likewise has a wide range of meaning and quality in different contexts. This is not a problem in itself. But given the range of real problems that add up to a true retirement crisis, the fact that the term means so many different things to different people may not be in the best interest of the people who matter most, plan participants.
Shades of Meaning
The Employee Benefits Research Institute (EBRI) looks at readiness largely in terms of risk: the risk of running out of money, in the aggregate for all Americans and broken out by demographics. This is certainly important from a policy perspective, but it doesn’t offer much practical help – either to actual individuals, or to the people and firms who serve them.
Responding to the same data, some commentators look at readiness as a continuum, and offer broad suggestions for improving readiness: save more, work more, etc. One mutual-fund company spokesman specifically offers that “people fall along a spectrum of retirement readiness, with 20%-30% of Americans ‘partially ready’ for retirement.”
Some insurance companies, unsurprisingly, define readiness as the result of education, or purchasing annuities, or possibly both. A recent survey of employers also focuses largely on education, expressing widespread concern that employees don’t make good decisions about retirement and don’t understand how to use their 401(k) plans effectively.
Another definition is simply financial literacy. For example, a National Bureau of Economic Research study summarized here assessed people’s understanding of basic investment concepts, and correlated the results with the likelihood that they “have a plan for retirement.” Without any measure of how realistic those plans might be though, it’s hard to see this as readiness. It’s more like “inclination to prepare to be ready.”
All these perspectives have their merits. Most at least pay lip service to what we believe is the most critical factor, likely retirement income. But we believe that being ready for retirement isn’t a spectrum, a body of knowledge, or a state of mind. It’s a fact. Accounting for a little statistical wiggle room, you’re either ready for retirement or you aren’t.
Knowledge is Power
We would define retirement readiness as: confidence, based on real financial facts and reliable projections, that you’ll be able to retire, securely, comfortably, and on your own terms. For many people, of course, this level of confidence is not a fact but an aspiration. Depending on circumstances it’s sometimes a pretty lofty one.
It’s our opinion that everyone at least deserves to know where they stand on the road to retirement. Once you know how far you have to go, you can make realistic plans for getting there.
The Demand Side
There’s little doubt that participants want it. A recent study of plan investors found that most would welcome more analysis of their situation and a focus on solutions to improve it. Specifically, a majority are interested in seeing projections of accumulation and retirement income in the future, instead of account performance in the past. According to a spokesman they want “insights on how to prepare and manage for retirement, rather than understanding the rules and mechanics” of the plan.
That’s strong evidence that participants have more investment savvy than they often get credit for: many of them at least know what they don’t know. And perhaps surprisingly, given the turmoil of the past few years, four in five trust their retirement plan provider, both as a fiduciary and as a potential source for guidance and planning. (We would argue that there’s no distinction between these duties.)
When in doubt, we always try to look at things from the perspective of the individual retirement investor at the proverbial kitchen table. That person very much wants to know the answer to a simple question, in simple yes-or-no terms: when the time comes to retire, will I be ready, or won’t I? As an industry we owe them an answer.