Known Unknowns of Retirement

Donald Rumsfeld famously parsed the myriad uncertainties of the world into two types: “known unknowns” and “unknown unknowns.” The former, he implied, are more manageable. While we might not have the answers, at least we know what questions to ask. The latter are more deeply troubling because we don’t even know yet that we should be worried about them.

Recent data on public beliefs and confidence about retirement give us very little to cheer about. But there is one piece of positive news. It seems that many Americans’ perspective on how they’ll pay for retirement is moving from the traditional stance of “don’t even think about it” into the Rumsfeldian realm of the “known unknown.”

These results come from the Employee Benefit Research Institute’s 23rd annual Retirement Confidence Survey, the longest-running study of its kind. A summary and the full report are available here. They show that workers and retirees share levels of confidence about funding a comfortable retirement that remain at all-time lows. Despite an economic recovery that has at last become broadly evident, from rising home prices and booming equity markets to declining unemployment numbers, optimism about retirement has not improved since the depths of the recession.

Facing Reality
The one significant change identified by the survey is something of a bad news/good news proposition. Fully 43% of respondents believe they need to save at least 20% of their income, and more than half of these put the number north of 30%. That’s bad news for them, considering that most are actually saving only a fraction of those amounts. The gap is undoubtedly a big contributor to their low level of confidence overall.

The good news, however, is that people are at least aware there’s a problem. It’s better that they’re able to quantify it. Or at least, they’re willing to make a guess: only 46% said they had actually tried to calculate how much money they’ll need to retire.

Does Advice Work?
The study also asked about a subject that’s very important to us, investment advice. Of those who had received professional advice, only 27% said they had actually followed all of it. Most chose to disregard at least some of the advice they had paid for. The study doesn’t say which parts were most often ignored, but it’s a reasonable assumption that savings rate is one of them.

One could draw the conclusion that advice doesn’t work. We would argue instead that this shows investment advice works best as part of a larger package. Build it into an easy-to-use savings vehicle. Make that more attractive with tax advantages. Default people into the program automatically whenever possible, to get them over the initial hurdle of choosing to save. Then ratchet up the savings rate automatically, too. And importantly: make guidance on savings rate and retirement date an integral part of the advice itself.

Sounds familiar? It should: it’s the managed account approach to 401(k) investing we’ve been providing for more than a decade.

Gloom and Boom
Taken together, the EBRI results offer a picture of workers who understand the need for retirement savings, have either general or detailed ideas of what to do about them, but can’t or won’t act. The report offers plenty of reasons. Concerns about household debt, worries about job security, and the need to pay for daily expenses all figured prominently. These all add up to pretty much the same thing: people either don’t have enough cash, or think they don’t, to save enough for retirement.

This doesn’t really answer the question, however. Why have workers and retirees grown more realistic, without becoming any less gloomy? Perhaps the crash of 2008 was a wake-up call that’s persisted longer than such lessons usually do (much like the recession itself). Maybe the precarious position of the Boomers has begun to resonate with a wider population. Or maybe all those big-budget financial services ads are finally starting to sink in.

We’d like to think the reason may be that GuidedChoice and other like us have been showing people where they stand in their retirement preparation. Whatever the reasons, we’re glad to see people getting the message about saving and the benefits of appropriately delivered professional advice. These are strange times, frothy with enthusiasm about many wonderful things, yet paralyzed by doubt and disagreement about others. We may have to take the good with the bad, but we’re happy to take it nonetheless.