Saving for retirement? Or planning for it?

31 August 2017 | Investing

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Commentary from Anna Madamba, PhD, research analyst with Vanguard Center for Investor Research.

When I was working in market research, one of my favourite aspects of the job was uncovering the nuggets of insight that would come, unprompted, from the investors themselves.

I encountered such a "nugget" at a recent research readout by Vanguard colleagues.1 In a focus group discussion, workers within ten years of retirement were asked to describe how they were planning for it. "By saving," one said. Asked to clarify, he said he was "planning for retirement by saving for retirement."

The statement gave me pause. Are there really investors whose view of retirement planning starts and ends with saving for it? Ideally, investors should be able to envision their retirement and then have a plan to get them there. Saving is just one step, albeit an important one. Retirement planning requires a deliberate consideration of financial and nonfinancial factors that could influence life in retirement.

But are a lot of investors just "winging it"?

As it turns out, most pre-retirees do think that retirement planning is more than saving. In a recent study2, we provided a list of "planning steps" for investors to consider that could have a financial impact on retirement. We then asked these pre-retirees to identify which of the steps they had completed. The good news is that the overwhelming majority—more than nine in ten—had done more than just saved. The downside? An apparent lack of breadth in their retirement planning.

Figure 1. Incidence of retirement transition planning

Percentage of pre-retirees who had planned for the following aspects of retirement

Incidence of retirement transition planning

Source: Retirement transitions in four countries. Anna Madamba, PhD, and Stephen P. Utkus, Vanguard Center for Investor Research, The Vanguard Group, Inc., January 2017.

For example, fewer than two-thirds had completed activities such as determining whether to work in retirement and other transition planning steps shown in Figure 1.

Figure 2. Incidence of retirement income planning

Percentage of pre-retirees who had planned for the following aspects of retirement (among those who expect to have the income source or own the asset type)

Incidence of retirement income planning

Source: Retirement transitions in four countries. Anna Madamba, PhD, and Stephen P. Utkus, Vanguard Center for Investor Research, The Vanguard Group, Inc., January 2017.

Fewer than half (48%) looked into generating retirement income or drawing down from their defined contribution plan (47%).

Figure 3. Incidence of holistic planning

Percentage of pre-retirees who had planned for the following aspects of retirement

Incidence of holistic planning

Source: Retirement transitions in four countries. Anna Madamba, PhD, and Stephen P. Utkus, Vanguard Center for Investor Research, The Vanguard Group, Inc., January 2017.

Even fewer tackled holistic topics such as managing taxes (40%) or paying for long-term care (25%).

So while the incidence of planning is generally widespread, comprehensive retirement planning is less common.

Access to advice, through a financial advisor or in conjunction with a workplace retirement plan, could help facilitate this important undertaking. Pre-retirees need help expanding the breadth of their retirement planning to include a broader set of issues they may not normally think of, given more immediate decisions accompanying the transition to retirement. The list of holistic planning topics are examples, which only a minority of pre-retirees have undertaken.

Pre-retirees would also benefit from a deeper understanding of these steps, especially the more complex topics such as creating a retirement income paycheck. In fact, we learned that pre-retirees who have attempted it found the area of retirement income planning challenging and identified it as the area where they needed help the most.

The majority of pre-retirees recognize that retirement planning is more than just saving for retirement. The challenge facing investors and advice providers is increasing the breadth and depth of the topics they are tackling. Advice systems need to evolve to address the comprehensive list of decisions that pre-retirees face today.

1 Thanks to Jean Bitner and Theresa Westwood who oversaw the focus group research.

2 Retirement transitions in four countries. Anna Madamba, PhD, and Stephen P. Utkus, Vanguard Center for Investor Research, The Vanguard Group, Inc., January 2017. Survey respondents are those planning to retire within ten years and those who retired within ten years of the survey. They had a minimum of $50,000 in household investable assets (the median asset category is $100,000 to $250,000). Countries covered in the survey are Canada, Australia, the United Kingdom and the United States.

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