The 2015 Aegon Retirement Readiness Survey identifies a group of individuals who feel better prepared than others, and takes a closer look at who these people are and what they are doing to plan for retirement.
The Aegon Retirement Readiness Survey has been measuring peoples attitudes and aspirations for their retirement since 2012. The 2015 survey questioned over 16,000 people in 15 countries - including Australia for the first time.
Improvements in life expectancy have become an established fact of life. With people now expecting to live well beyond the age of 80 in many countries, our survey participants say they expect to live an average 20 years in retirement.
The expectation is that retirement will now last longer than childhood, providing clear public recognition that retirement is a major life phase. As such, it rightly requires a robust approach to financial planning. However while people may recognize that time spent in retirement is growing lengthier, it is not reflected in their long-term planning.
In 2015, we introduced a new blueprint for retirement saving: making habitual saving a global trend. This places the focus on making retirement planning easier. All too often, people put off saving for retirement either because of perceived complexity or because of the cost of retirement saving. Such barriers have a significant impact on preventing people from saving.
As many as 4-in-10 people are not saving anything for their retirement, but half of these non-savers have aspirations to save for retirement. Financial considerations such as receiving a pay raise (45%) or more generous tax breaks (33%) would help to unlock the savings potential of many non-savers. Likewise, simplifying investment products could encourage a further one-fifth of non-savers to start saving.
Overcoming these barriers – and converting those who are aspiring savers into habitual savers – is a key message in this year's findings. Saving habitually is the best way to improve one's long-term retirement outlook.
Three-quarters of people who are habitual savers achieved a medium or high ARRI score compared with fewer than half (46%) of those who save on an occasional basis.
Habitual saving is a realistic aspiration
For most people, saving habitually is a realistic aspiration given that the average habitual saver earns approximately $41,000 per year. This falls to $29,000 in the emerging economies, broadly in line with the average earnings in most countries we surveyed.
The power of habitual saving is further boosted when combined with starting to save at an early age. Habitual savers, earning $41,000 per year, could look to boost their retirement incomes by $11,000 if they decide to start saving from age 20 rather than choosing to delay retirement savings by 10 years to age 30.
The survey shows that coverage of workplace retirement plans is widespread, with over a quarter of employees (26%) benefitting from a defined benefit pension plan (final salary or average earnings based) and a further 18% benefitting from a defined contribution or money purchase plan. In total, 41% of employees say they have access to a workplace retirement plan with employer contributions.
Additionally, 24% say that they have access to a plan where their employer does not contribute. In addition to providing workplace retirement plans, employers also provide a range of other benefits.
Over half (57%) currently provide private medical insurance, while life insurance is made available by 38% and stock purchase plans are provided by over one-fifth of employers (21%) – all of which demonstrates the varied ways in which employers contribute to the financial resilience of employees throughout their working and retired lives.
Employees can help more
But employers can do more to help their employees in building their retirement preparedness. Changing the design of workplace retirement plans is crucial. By including features such as automatic enrollment and automatic escalation, employers already play a large role in some countries. Notably in the Netherlands, mandatory participation results in over 88% of employees being covered by private pension plans.
We can see that these features help aspiring savers to realize their savings goals. Fifty-nine percent of those who are not currently saving, but who aspire to do so, say that they would view the prospect of being automatically enrolled into a workplace retirement plan with a 6% contribution rate as being an attractive option. Employers can also build workplace retirement awareness programs around important savings triggers such as receiving a pay raise. Nearly half of non-savers (45%) say that receiving a pay raise would encourage them to start saving for retirement. This represents a major opportunity for affecting changes in employee savings behavior by automatically increasing contributions in line with future increases in salary.
The survey findings also reveal a genuine benefit to employers who provide employee benefits. Six-in-ten employees say that retirement plans make them feel valued and therefore more loyal. Seventy percent say that workplace retirement plans should be part of their basic pay and conditions, while a quarter (26%) say that having a better matched pension contribution from their employer would encourage them to save.
Government plays a vital role in both providing retirement incomes through government retirement benefits, as well as in facilitating and encouraging people to take more responsibility for their own retirement security.
Reforms to employer retirement plans and labor laws can also remove obstacles to people working longer. These reforms at a minimum should include incentives for participation in employer retirement plans, facilitating better decision-making through access to advice, information and guidance, as well as workplace changes to permit people to continue to work productively past normal retirement age.
One-third of global respondents say that having access to more generous tax breaks on long-term savings and retirement products would encourage them to save more for retirement. Given the current pressures on public finances in many countries, it is crucial that governments maintain a commitment to tax incentivized long-term savings.
Nearly 1-in-5 people (18%) say that having access to financial education would help them to become more aware of what they need to do to plan for retirement, while a similar number (17%) say that having access to financial advice for personalized recommendations on the steps they should be taking would also help them. Across many of the countries in our survey, governments recognize their role in promoting access to information and advice, but there is still much progress to make.
Being healthy and saving regularly go hand-in-hand. Seventy-seven percent of survey participants who describe themselves to be in excellent health are positive about retirement compared with 49% of those in poor health.
Among those not fully retired, excellent health correlates to their confidence to be able to live a comfortable retirement lifestyle (42% versus just 7% of those in poor health). Three-quarters of habitual savers (74%) rate their health as "excellent or good," compared with just 62% of non-savers. The need to promote better health and vitality is key in helping people to enjoy the active retirement they aspire to.
Half of those surveyed would like to spend more time pursuing new hobbies when they retire. Two-thirds would like to travel more, while around 1-in-6 people would like to continue working in the same field after retirement. However, achieving all of these goals will require people to maintain a healthy lifestyle during their later years. Here again, governments and employers can play a role through providing access to employment and healthcare support for older workers.
Flexible retirement unavailable
Staying mentally alert is an important factor in helping people feeling vital. Currently just 24% of retirees say they were offered the opportunity to switch from working full-time to part-time when they reached normal retirement age. Only 19% say that they enjoyed access to flexible retirement plans which enable employees to choose when they retired.
Finally, few employees receive access to the sort of healthcare services designed to keep them fit and economically active in later life. Potentially, as many as one-third of those who would like to extend their working lives are missing out. Not only do they fail to achieve their aspiration of working into retirement, but they may even be forced to retire early.
Health is one of the main reasons for this trend so it stands to reason that by focusing on healthcare provision for older workers we can make a major contribution to achieving the active retirement that so many employees desire. It is also possible for employers. Keeping the above 50s in the workforce can help drive improvement in customer satisfaction, adding to bottom line profitability.
Habitual savings is most effective when started early and therefore should be taught and engrained in the culture at an early age.
Children should learn to manage budgets and debt as well as the power of consistently saving starting from a young age. Providing financial literacy programs in schools is critical given that students often do not learn basic financial skills at home, either because of cultural biases against discussing financial matters or because parents themselves do not possess these skills.
Financial literacy aimed at parents should therefore also be a priority. Those who are at risk of falling short with their retirement plans - for example, women and younger people - need to give particular attention to their specific financial planning needs. Using freely available online financial education tools offers these people a good starting point in developing not just a retirement plan, but also a plan for the unforeseen financial risks (our so-called "Plan B").
To achieve this, individuals need the right framework in which to fund for retirement through a combination of saving more and remaining active into retirement. Here, employers and the government can play a leading role.
Employers can facilitate habitual savings by designing retirement savings plans that overcome obstacles to save.
- Implement programs to enable employees to directly and automatically defer a portion of their income. As many as 59% of aspiring savers are attracted to automatic enrollment with contributions rates of 6% of salary. This falls only slightly to 53% if the contribution level is increased to 8% of salary.
- Automatic enrollment programs in the U.S. have proven extremely effective in expanding participation by harnessing the power of inertia to start employees on a consistent long-term savings program.
- Ensure equal access to full- and part-time employees in workplace savings plans. Other parts of the world could follow the European Union's lead, which prohibits employers from excluding part-time workers from workplace retirement plans.
- Coordinate workplace financial education programs with important trigger points, like receiving a pay raise. Receiving a pay raise is the biggest factor that would encourage people to save for their retirement being cited by nearly half 45% - of employees. Committing all or part of any pay raise to longterm savings is an easy way for employees to save without changing their budgets.
Where possible, employers can support these efforts to change behavior alongside the provision of cost-effective workplace financial advice.
Employers are encouraged to adopt age-neutral employment policies. Simple workplace changes can include more flexible work schedules, physical modifications to help older workers e.g. computers with larger type fonts as well as arranging workspace in a location close to the elevators. Continuous training should be provided for all employees so that they can improve their skills and continue to contribute as they near and pass normal retirement age.
Employers can promote better health among employees. Healthy and active individuals are more likely to create a retirement savings strategy; three-quarters of habitual savers are in excellent or good health compared with fewer than two-thirds of non-savers. Physical, emotional and financial well-being are all linked. Wellness programs reduce health insurance costs and boost productivity. They also help to retain mature workers thereby reducing recruitment and training costs when replacing employees.
Governments can help encourage more employers to implement workplace retirement savings plans by reducing the cost and regulatory burden for employers in sponsoring such plans, as well as in implementing features such as automatic enrollment and auto escalation.
Governments can run public awareness campaigns to help people make the most of their workplace benefits particularly as employees near retirement. For example, the U.K. is just launching a new national Pension Wise service specifically to perform this role.
Governments could reform retirement ages to send a clear message about working longer, and phasing retirement. Mandatory retirement ages should be abolished unless proven otherwise necessary for public safety (e.g., firefighters, pilots, etc).
Governments could provide better incentives for employees to defer commencement of their retirement benefits and receive an actuarial increased pension at the date they elect commencement of their benefits. Defined benefit plan formulae that provide a decreased value of accrued benefits for workers past a certain age should be struck down as discriminatory. A good example of phased retirement is the voluntary program that was enacted for U.S. federal government workers in 2012 where pension benefits continue to accrue for phased retirees work past their traditional retirement age.
By better integrating tax, social security and healthcare systems, governments could facilitate workforce education and wellness programs by sharing the costs with employers and employees. This could include exempting employer-provided insurance policies from tax. Again, this would help potentially to shift the burden of individuals coping with financial shocks like critical illness and long-term incapacity away from taxpayers.
Governments could undertake an impact assessment of the overall cost-benefit of supporting well-being, recruitment and retraining programs among older employees. Governments can take steps as employers to ensure that public organizations have the appropriate polices in place for encouraging the recruitment and retention of workers who are aged over 50.