One of the most complex decisions people face today is financial planning for retirement. With the well-documented transition from state and company sponsored pension plans to individual IRA and 401(K) plans, much of the burden has shifted from financial professionals onto individuals. Recent research from Wells Fargo and Gallup shows that few investors understand the key steps needed to plan for and pursue the retirement they desire and deserve. The objective is clear: a whopping 98% of investors want a sustainable and guaranteed stream of income in retirement, in addition to Social Security. However, only 19% of investors have thought through the key steps to working toward their retirement goals, such as how much to save and how much can be withdrawn from their nest egg in retirement.

In this post, we discuss these key findings, and provide insight for the industry so that investors may in the future have an easier and better way to plan for funding the retirement they want and deserve.

Key investor objectives: Guaranteed income and flexibility in spending money in retirement

Recent results from a Wells Fargo / Gallup Investor and Retirement Optimism survey reveal that when planning for retirement, investors want security in the form of guaranteed income, along with a degree of liquidity that provides flexibility on how to spend their money.

  • 98% of non-retired investors say they want a guaranteed stream of income in retirement, in addition to Social Security.
  • However, investors appear somewhat confused and contradicted in their responses. For example, 61% of investors are willing to give up access to some of their money to get guaranteed income, but at the same time, 75% of investors also want the freedom to spend their retirement savings, even if that means running out of money too soon.

While investors know they want sustainable income that will last through their retirement, the survey results indicate that they need help in understanding how to attain it. Since many guaranteed income strategies (such as immediate annuities) give up liquidity, investors need to decide for themselves, which is more important for their own situations. For example, those who wish to position for unexpected health care or other expenditures may prefer more flexibility and access to savings. At retirement, investor drawdown needs and longevity are uncertain, so many investors need the flexibility in how to spend their nest eggs, while still having an insurance backstop that provides them the desired guaranteed additional income.

What’s your savings goal?

To better understand the challenges investors are facing, the Wells Fargo/Gallup survey broke down the financial retirement planning problem into more achievable tasks. First, the survey asked if investors have a retirement savings goal. Only 53% of the polled had a number in mind. Additionally, the responses ranged from some investors thinking that less than $500,000 is enough, to others saying that more than $5 million will be needed, which may be reasonable depending on their own financial situation and objectives. Market conditions also play a large role, with many 401(k) account balances having received a recent boost from robust market performance.

To establish a realistic savings target, investors may benefit from linking their savings goal to how much annual spending it will provide to them in retirement. For example, to achieve $42,000-$56,000 in annual spending (inclusive of Social Security Income), Wells Fargo Asset Management estimates that investors need to save $1.2 million by retirement. These estimates are based on our proprietary retirement income modeling research that assesses the likelihood of generating sustainable retirement income streams based on assumptions regarding investor risk tolerance, longevity, expected equity and bond returns, and other factors.

Wells Fargo and Gallup’s research shows that investors with a specific goal and with 401(K) accounts are more confident about their retirement. Perhaps not surprisingly, those with higher savings goals are also more realistic about the amount of annual retirement income their savings will generate. A savings goal is a good first step in the financial planning for retirement.

What’s your expected retirement income?

Our survey also asked investors how much they expect to spend annually in retirement based on their savings. A long-standing rule-of-thumb has been that 4% of an investor’s savings is sustainable, depending on variables such as market conditions. Many of the results were surprising. Almost half (48%) of non-retired investors estimate that they will be able to withdraw more than 5% in annual retirement income, with some expecting more than 20%! Unfortunately, many investors do not have a realistic idea of how much money they’ll be able to sustainably withdraw. We estimate that even at a 5% withdrawal rate, there is a 20-30% risk of running out of money in retirement.

Expected annual withdrawal rate from retirement savings. Based on non-retired U.S. investors with a retirement savings goal who are able to estimate amount they will withdraw annually in retirement.

The following hypothetical chart illustrates how a 5% withdrawal rate could result in a savings shortfall for a woman who retires at the age of 65 with $1 million in her 401(k) account. To assess the likelihood of her running out of money in retirement, our research team looked at three hypothetical market scenarios during her first five years in retirement: “normal markets”, “low return markets”, and “no return markets”.

This chart illustrates how a 5% withdrawal rate could result in a savings shortfall for a woman who retires at the age of 65 with $1 million in her 401(k) account.

Rather than fixing the withdrawal rate, investors may also adjust the rate based on their asset levels, so when savings decline, they spend a smaller fraction of their assets, even if their standard of living were to fall substantially below its previous levels. This could impact women more than men, given women’s longer life expectancies. Having a realistic retirement income in mind is a key second step in retirement planning.

Simple actions for investors to better plan for retirement

Planning for retirement is a big task, but spending some time now and setting attainable goals can help investors prepare for the retirement they desire. Additionally, many employers provide resources that can help. Here are some steps to get started:   

  • If you’re not saving yet, make a plan to begin saving, through options like 401(k) accounts or IRAs
  • If you’re already saving, review current savings goals and potentially increase your savings rates
  • Educate yourself on various investment options and retirement income solutions
  • Take advantage of your employer’s financial education resources and planning tools
  • Assess your current spending habits, and estimate how much you’ll need to spend in retirement
  • Seek help from a financial advisor

How employers and policy makers can help

Retirement planning is an area that investors don’t want to tackle alone. In fact, more than 50% of the Wells Fargo / Gallup survey respondents said that they want help from their employers in managing their investments through retirement. This number is even higher among women and younger investors. Clearly, investors need strategies to help them increase access to savings and investing for retirement. The Bipartisan Policy Center believes that all working Americans should have access to a workplace retirement plan, up from roughly 50% today. I agree, and would add that it is critical to help alleviate the bureaucratic burden that many smaller employers face, including costs, administrative complexity and fiduciary risk.

A retirement plan should optimally start with a reasonable savings rate, 10% or more in many cases, with automatic payroll deductions and diversified default investment options. Automatic plan features including enrollment, savings deferrals and increases, as well as default investment options and rebalancing can significantly enhance retirement investing outcomes.

Further, given the complexity of the drawdown part of investors’ retirement journey, we need to make it easier for investors to obtain a higher and more predictable income in retirement. DC plans are a great place to start, given their importance and prevalance for U.S. investors.

The 50% of Wells Fargo / Gallup survey respondents who seek assistance from their employers need more than a mix of investment options.

For them to make the most of their savings in retirement, they also need access to holistic planning resources, products, services, and advice that addresses withdrawal, longevity, retirement age, tax, and investment risk to optimize their retirement funding. And if our industry, employers, and policymakers can engage in conversation—and work together—we can help investors build towards the retirement success they deserve, while offsetting a retirement savings crisis in the making.


About the Wells Fargo/Gallup Investor and Retirement Optimism Index

These findings are part of the Wells Fargo/Gallup Investor and Retirement Optimism Index, conducted Nov. 1-5, by telephone. The index includes 1,015 investors, aged 18 and older, randomly selected from across the U.S. with a margin of sampling error of +/- 4 percentage points. For this study, the American investor is defined as an adult in a household with total savings and investments of $10,000 or more. About two in five U.S. households have at least $10,000 in savings and investments. The sample size consists of 67% non-retirees and 33% retirees. Of total respondents, 41% reported annual incomes of less than $90,000; 59% reported $90,000 or more. The Wells Fargo/Gallup Investor and Retirement Index is an enhanced version of Gallup’s Index of Investor Optimism, which provides the historical trend data. The median age of the non-retired investor is 47 and the retiree is 68.



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