The 2014 Aegon Retirement Readiness Survey shows that despite improving economic sentiment, people have clear concerns about their retirement. They do not feel sufficiently prepared and, worryingly, they are not acting on it.
The Aegon Retirement Readiness Survey has been measuring peoples attitudes and aspirations for their retirement since 2012. The 2014 survey questioned over 16,000 people in 15 countries - including Brazil, India and Turkey for the first time.
The survey findings illustrate a number of changes in employee sentiment as the outlook for the global economy continues to grow more positive. For instance, one-third of respondents (31%) now expect their personal finances to improve in 2014. In last year's survey, 25% held this view.
As in 2013, people continue to hold positive aspirations for retirement, with many associating retirement with leisure (46%) and a sense of freedom (41%). Nevertheless, this is combined with a continuing widespread lack of confidence that retirement will actually deliver these benefits. One-third (34%) of employees are pessimistic about having enough money to live on in retirement, and just 19% are "very" or "extremely" confident that they will be able to fully retire with a lifestyle they consider comfortable. This confidence is especially low in Europe, with the figure in France just 6% and in Poland 4%. Furthermore, one-third are pessimistic about their ability to choose the time at which they retire, while only half (51%) are optimistic that they will be able to maintain good health in retirement.
Only one in six (18%) expect to be better off in retirement when compared to current retirees, revealing a widespread sense – particularly strong in Europe and North America – that the sort of retirement currently being enjoyed by their grandparents or parents won't be available to future generations. In the future, retirement will come to be defined very differently. In particular, it will require a larger role for paid employment as the notion of retirement becomes more flexible.
Financial planning will be central in addressing concerns about income shortfalls and the pessimism about how and when people enter retirement. However, few people are currently preparing adequately for their retirement. Just one in six (18%) achieved a high Aegon Retirement Readiness Index score in 2014 (a score of more than 8 out of 10 based on six questions in the survey gauging retirement attitudes and planning). In contrast, over half (55%) of employees recorded a low retirement readiness score (a score of 6 or less out of 10).
Underlying these low scores is a widespread lack of retirement saving and planning. While 34% of "habitual savers" achieved a high Index score (twice the global average), 82% of "non-savers" found themselves with a low Index score. The priority must be to encourage more people to start long-term saving, and to save regularly as part of a comprehensive retirement strategy. While nearly half (44%) of employees have a strategy, only one in eight (12%) has a written retirement strategy. worryingly, 40% say they have no strategy at all. Another 4% replied "do not know."
A major step-change in retirement planning, and indeed life-long financial planning, is required to help people in the event their circumstances change. Currently 61% have no back-up plan to provide them with an income in the event that they become unemployed or are unable to work for a prolonged period before their planned retirement. Given that 45% of retired respondents tell us they had to retire sooner than planned as a result of events like ill-health (34%) or losing their jobs (25%), this is a very real risk facing people, many of whom are not preparing for it.
Financial constraints on households continue to explain why some people are not saving enough for retirement. Only 28% of employees have enough money to invest for their retirement, while 48% said that receiving a pay raise would encourage them to save more. Faced with these financial realities, governments, employers and pension providers have a shared responsibility to help people plan for their own retirement by making the process as easy as possible and creating the right incentives to save.
One of the clearest signals governments can send to employees about the benefits of saving is through the tax system. Most countries offer some kind of tax relief to encourage long-term savings, but such support has come under pressure as governments look to balance public sector budgets. Nonetheless such tax benefits remain important, with 32% of respondents agreeing that more generous tax breaks would encourage them to save more.
Employers have a dual role to play in providing both financial support in the form of workplace pensions and other workplace savings products, as well as services such as online retirement planning tools or workplace financial advice. Overall, 63% of employees say that they find the prospect of being automatically enrolled into a workplace pension appealing. On average, employees envision contributing 6% of their salary, and think it reasonable for their employers to contribute 8% into an auto-enrolled retirement plan.
The financial services industry can also play a role, given that 21% of respondents say that they would save more if investment products were simpler and easier to understand. Twenty-four percent would also like products that make it easier to track and manage their savings. Despite the demand for greater simplicity, there is still a role for the industry in offering guidance, information tools and professional financial advice. Twenty percent of respondents say that more frequent access to information about their retirement savings would encourage them to save more, while 17% would like access to professional financial advice that includes personalized recommendations.
Many current employees expect to have some kind of phased transition into retirement, with 29% saying they will first move to part-time work before giving up work altogether and 17% planning to move to part-time work and continue that throughout retirement.
Only 32% of future retirees expect to stop work completely at retirement age. This view continues to be more common in certain European countries including Spain and France where the notion of a "cliff-edge retirement" is still supported by a small majority of employees.
Among current retirees, only 9% worked beyond their planned retirement age. But those who did, did so mostly for positive reasons as people looked to keep themselves mentally and physically active. It is clear from the findings that employers will need to do more to support flexible retirement. Currently, only 23% allow their employees to go first into phased, part-time retirement and only 12% offer retraining. Furthermore, 52% of employees say their employers currently do not provide enough information or support to help employees transition into retirement.
Underpinning this shift in behavior at retirement is the level of support among employees (52%) for some sort of increase in the official retirement age. However, there is a degree of reluctance to change among a large minority, with 41% of respondents saying their working lives are already long enough. Governments will have an important role to play in shifting people's expectations by modifying official retirement ages or, in some cases, abolishing mandatory retirement ages altogether.
The good news is that people are increasingly aware that they need to save for retirement. This awareness is not enough, however. Too few are putting money aside for old age. Governments, employers and individuals all share responsibility for translating awareness into action.
Governments and employers should provide individuals at least once a year with a concise and clear statement of the benefits they can expect to receive in retirement, as well as the tools and information they need to make an effective savings plan for themselves and their families. Individuals should use this information and obtain any additional professional advice to create and implement their own retirement plans.
Individuals will save more if they see an improvement in the economic environment and – importantly – if they are given the right financial incentives. Governments need to provide proper tax incentives to encourage personal savings and employer contributions. In doing so, they will reduce dependence on government programs, and ensure more people retire with a sufficient income level.
To encourage savings, it is important to protect these incentives, as far as possible, from cuts to government spending. To be truly effective, incentives should be easy to calculate and take advantage of without overly complex rules or paperwork.
There's a clear need for a limited range of easy-to-understand retirement savings products. Too much choice causes confusion and results in many people making no choice at all. One solution that has proven successful in several countries is auto enrollment of employees into employer savings plans.
Enrolling an individual within the first year of work counters the inertia and indecision which paralyzes so many, and helps create regular, long-term savers.
Auto enrollment should be coupled with steady increases in amount saved, as an individual's salary rises. Another useful feature would be to default the savings into a lifecycle or target investment vehicle that rebalances an individual's investment as they age and simplifies the investment process.
Our survey shows that the best way of preparing for retirement is to start early and save regularly. More needs to be done to educate people on the benefits of this approach – which is far more effective than starting later in life and saving larger amounts for a shorter period.
Starting early also helps cushion against unexpected events such as illness and unemployment.
Research shows that almost half of workers leave the workforce prior to expected retirement, for any number of reasons including disability or illness, caring for a family member and job loss.
Individuals must make provisions for this in their retirement plans to avoid running down their retirement savings. A back-up plan could include setting up a personal emergency fund or obtaining insurance to protect against loss of income because of disability or unemployment.
More people want to stay active longer – including through work. Working longer – beyond official retirement ages – would not only help individuals bridge gaps in their retirement savings, but also save government money and ensure individuals' continued contribution to the economy.
Given the current aging trends, older workers may prove crucial in the future to sustainable economic growth and a prosperous economy. Both labor laws and employment policies need to change to take account of this new reality.
Changes should include phased retirement programs and re-training for older employees. Employees should be able to reduce their workload gradually as they near full retirement, and should be entitled to draw part of their retirement benefits while still in work. If flexible retirement is to be a success, making these changes will be vital.