Morningstar Magazine - August/September 2018 - 16

Dispatches

Easing the
Retirement Crisis
How financial planning
and personalized
advice can head off
extreme austerity.
BEHAVIORAL INSIGHTS

Stephen Wendel
Many Americans face a scary prospect: surviving
on much less money during retirement than
they're used to living on or not being able
to afford a retirement at all. Every year, there are
new reports about how many Americans
are unprepared for retirement, with headlines
like "42% of Americans Will Retire Broke"
(Huddleston 2018) and "How 401(k)s Have Failed
Most American Workers" (Morrissey 2016).
There's sometimes debate among academics and
researchers about the precise nature of
the retirement-savings gap (Rhee 2013; Bee and
Mitchell 2017; VanDerhei 2015). No matter
how you slice it, however, nearly half of
Americans have saved nothing for retirement,
and the median 401(k) balance is less than
$10,000 among working-age U.S. households
that have saved something (Spiegel 2018;
Grinstein-Weiss 2015). If that amount doesn't
change, people's ability to comfortably
retire is severely limited, and they're highly
dependent on Social Security remaining solvent.
And many Americans are worried. In a
recent EBRI survey, for example, only 17% of
U.S. workers felt very confident in their ability
to retire comfortably (EBRI 2018).
Dire outcomes-needing to live on very little
during retirement or failing to retire until
much older-are vivid and daunting; they capture
people's attention and drive anxiety. It needn't
be that way, though.

In a new Morningstar research study, we ask
what Americans, and their advisors, can
do to better prepare for retirement. We find that
the bleak picture can change-if specific
actions are taken. This article summarizes
the results of that research. For more information
on the study, and related pieces, see
Morningstar's Investor Success Project at
www.morningstar.com/company/investor-success.
Our Simulation
In the research, we analyze eight changes
individuals can make to better build their financial
future. The actions fall into three categories:
financial planning (adjusting one's standard of
living in retirement; delaying retirement; increasing
contribution rates), investing (increasing
net returns from investing; using a more
aggressive asset allocation), and investor behavior
(signing up for increased contributions over time;
starting with a larger amount of savings; and
choosing whether to invest one's savings at all).

The analysis employs a simulation model to
forecast the effects of changes in U.S. saving and
investing behavior on people's ability to fund
a comfortable retirement, based on a nationally
representative sample of Americans from the
2016 Survey of Consumer Finances. Each
simulation starts with an individual's current
situation, then tracks the person's assets
up to retirement, modeling contributions, changes
in asset allocation according to a standard
investment glide path, and market performance
affecting the portfolio. At the end of the
simulation, it calculates two primary values:
1 The percent of need available-the amount each

person has available to them on the first day
of retirement (including Social Security1), divided
by their total retirement need. Because
market conditions vary, we examine two snapshots
in particular: "normal markets" (50th percentile
of outcomes) and "bad markets" (20th percentile
of outcomes).
2 The probability of success-how often the person

achieved his or her total retirement need

1 The analysis incorporates a limited estimate of the person's future defined-benefit income from the Survey of Consumer Finances.

Morningstar August/September 2018

across 1,000 simulations with randomly varying
market performance. This is a measure of the
person's safety, or security.
This analysis ran about 400 million simulations
in total: 3,916 households in the nationally
representative sample, across 100 scenarios in
which the households change contribution
rates, their retirement ages, or other aspects of
their financial lives, across 1,000 randomly
determined market scenarios.
The Financial Future of Americans
The analysis starts by establishing a baseline for
the U.S. public: Will Americans be ready
for retirement? As many other researchers have
found, the picture is grim.

We found that approximately 25.6% of the working
population is likely to have what they need under
normal (50th percentile) market conditions.
Under bad market conditions (20th percentile), 18.5%
of the population would have what they need.
Even among mass-affluent households (more than
$100,000 in investable assets), approximately
45.3% are projected to have the retirement savings
they need by the first day of retirement, under
normal market conditions. Only 32.2% would have
what they need in bad markets.
To visualize results across a group of households,
we used a density plot showing the relative
percent of those households at each level
of funding for their retirement need ( EXH IBIT 1 ).
What Is Most Effective?
We then analyze eight actions that individuals
and their advisors could take, ranging from
delaying retirement to increasing the proportion
of stock in their portfolios. What did we
learn? For both the general public and massaffluent households, it's the basics that matter
the most. Saving more, choosing to invest
one's savings, delaying retirement, and lowering
standard-of-living expectations have a far
greater effect than asset allocation, reducing
fees, or achieving alpha.

http://www.morningstar.com/company/investor-success

Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018