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Home | Articles | Study Finds Middle Class Americans Teeter on Edge of Retirement Cliff

Study Finds Middle Class Americans Teeter on Edge of Retirement Cliff
October 23, 2012
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In the final weeks before the Presidential election, much has been said of the "middle class squeeze" and the "fiscal cliff," but a greater obstacle looms in the distance: millions of Americans who are underprepared for retirement with diminishing prospects for how to manage their future and avoid poverty.

Half of middle class Americans (52%) say their most important day-to-day financial concern is paying the monthly bills, up from 37% a year ago according to the latest results from the annual Wells Fargo Retirement Survey (http://www.wellsfargo.com), a telephone survey conducted by Harris Interactive of 1,000 middle class Americans, ages 25 to 75, interviewed between July 9 and Sept. 4. Saving for retirement is in second place with less than a fifth (16%) saying it is a key concern. Over half of pre-retired Americans (53%) say they are not confident they will have saved enough for the life they want in retirement, up from 42% percent in 2011.

One third (30%) of Americans say they will need to "work until at least 80," in order to live comfortably in their retirement years, up from 25% a year ago. Yet, 73% of Americans said their employer would not want them to work in their 80s. Similar to 2011, 70% of middle class Americans say they'll work in retirement, with 39% saying they'll work out of financial necessity.

Thirty-four percent of middle class Americans estimate their retirement income will consist of 50% or less of their current annual income. According to the U.S. Census Bureau, median household income for Americans in 2011 was $50,054. Americans say they need less than half of their pre-retirement income and this translates to $25,000, close to the poverty line for a family of four according to the government.

"It is so tough for Americans to save for retirement, and we feel it is very important to keep shining the light on this issue. People say they'll work longer, but how possible will this be for millions of Americans? Preparing for retirement can't be kicked down the road because the other picture that is emerging is how many people will live very close to the poverty line in retirement. We've got to marshal our resources as a country, an industry and as individuals to deal with the issues creating this cliff," said Joe Ready, director of Wells Fargo Institutional Retirement and Trust.

Who's Responsible for Your Retirement?

The survey asked Americans to assign a proportion of responsibility for funding their retirement and a clear majority of responsibility, 50%, was assigned to the individual through saving and investment, followed by the employer through a pension (27%), and followed by the government through Social Security (24%). While individuals see themselves as primarily responsible for retirement funding, there is a difference of intensity based on party affiliation with 56% of Republicans saying retirement is on the shoulder of the individual through savings and investments versus 42% of identified Democrats.

"People tell us that retirement preparation should be on their shoulders but they are grappling with the financial pressures of each day. As a result, retirement has become a guessing game. But, people can't afford to approach twenty plus years of their life by ignoring the facts. People are telling us that times are tough financially -- even more so than a year ago -- but people also need to take action," said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust.
Key highlights of the survey include:

  • 70% of middle class Americans say they are not confident in the stock market as a place to invest for retirement.
  • Three quarters (75%) of Americans describe their calculations for retirement to be some sort of a guess and 22% who describe their planning efforts as detailed and based on "calculations."
  • When provided with a list of activities, middle class Americans say that in the last 12 months, they've spent the most time 'planning' a home remodel, followed by planning a vacation. Planning for retirement fell to third place in the list of priorities.
  • A little more than a third (36%) of Americans has a written plan for retirement, up from 30% in 2011. 46% of people between 50 and 59 attest to a written plan.
  • Middle class Americans believe the median cost of their out-of-pocket healthcare costs in retirement will be $47,000. The Center for Retirement Research has estimated a typical couple at age 65 can expect to spend $260,000 or more over their remaining lifetime.
  • If given $5,000 to invest for retirement, 40% say they would invest it in a CD or savings account, 24% would invest in stocks and 22% say they would invest the money in gold or precious metals. Of note, 37% of middle class Americans in their 30's would invest the money in the market versus 18% of Americans between the ages of 25 and 29.

What Do People Say They Need in Retirement?

Middle class Americans say they will need a median of $300,000 to support them in retirement, but to date, have only saved $25,000 (median). When asked what percentage of their nest egg they expect to withdraw annually in retirement, the median withdrawal predicted by middle class Americans is 10%. Many experts say withdrawals should be maintained at three to four percent.

Almost half (40%) of middle class Americans without a written retirement plan say they haven't planned for retirement because they are too focused on "current financial obligations." This is particularly true for people in their 50s, of which 54% say they are too focused on today to plan for the future.

Half of middle class (51%) Americans say they need to "significantly" cut back on spending money in order to save for retirement, and this jumps to 61% of those who are in their 50s -- prime retirement saving years.

401(k) is Best Retirement Savings Vehicle

Americans say the 401(k) is the "best retirement savings vehicle," followed by the IRA and a savings account. Thirty-four percent of Americans who have a 401(k) available through their employer are saving between 3 and 5% in their 401k plan, and 32% are saving between 6 and 10%, and 12% are saving 11% or more for their retirement. Those contributing to a 401(k) report more companies are offering the match (77%) this year versus 66% a year ago.

Although most 401(k) investment options include investment expenses, a majority (82%) of Americans with a 401(k) available through their employer say they do not pay an investment fee on their 401k plan.

401k Views and Political Party Affiliation

The survey examined American views on the 401k based on party affiliation.

  • Three quarters of Americans (74%) say that employers should provide personal advice to help employees manage their retirement savings; 67% of those who identify themselves as Republican support advice versus 86% who identify as a Democrat.
  • Sixty percent of Americans say plans should automatically increase contribution rates by 1% each year; 56% of Republicans agree with this versus 72% of Democrats.
  • Fifty-nine percent of Americans say plans should automatically enroll employees in the plan; 55% of Republicans support auto enroll versus 77% of Democrats.

Social Security Plays a Lead Role in Retirement Vision

Social Security continues to be a strong component of retirement planning for the middle class. Middle class Americans between the ages of 25 and 75 expect to begin taking or began taking Social Security payments at the median age of 65 and estimate payments will cover a median of 25% of their monthly retirement income. However, 27% of people between the ages of 25 and 49 say that Social Security won't cover any portion of their retirement.

Yet, for those who say they expect to take Social Security, a majority (71%) of non-retirees said they would prefer delaying the age they begin taking Social Security so they receive higher payments. There are differences between the genders, with 51% of women in their 40s and 50s predicting they'll take Social Security between the ages of 61 and 65, versus 35% of men.

As the country continues to debate strategies for reducing the deficit, the number of middle class Americans who say they would be willing to accept a reduction in Social Security or Medicare to help reduce the country's debt burden has declined to 37%, down from 43% in 2011. There is a pronounced difference between men and women between the ages of 40 and 59 when asked whether they'd be willing to take a cut in Social Security and Medicare, with 44% of men saying "yes" versus 26% of women who would agree to cuts.