Goldman Sachs: Fostering ‘Financial Grit’ Is Key to Improving Retirement Savings

Because of easing inflation and improving economic conditions, working individuals who responded to questions for Goldman Sachs Asset Management’s “2024 Retirement Survey & Insights Report” reported that competing financial priorities had less of an impact on their ability to save for retirement during the past year than they reported in last year’s edition.

This is the first time Goldman Sachs observed a year-to-year decline in the impact of competing financial priorities on retirement savings since the onset of the pandemic.

However, despite this improvement, 60% of individuals still reported they will need to delay their retirement due to what Goldman Sachs calls the “financial vortex,” which includes financial hardships, the cost of caring for family members, student debt, credit card debt and other expenses.

Goldman Sachs surveyed 4,874 individuals in July, including 3,280 working individuals across generations and 1,594 retired individuals ages 45 through 75 in its recent study. The research was released today.

While working participants expressed optimism about their finances, with 48% reporting an improvement, 29% of participants reported increased credit card debt, 33% reported less cash on hand for emergencies and 52% reported an increase in everyday expenses.

Christopher Ceder, a senior retirement strategist at Goldman Sachs Asset Management, said in a media roundtable on Tuesday that credit card balances and personal consumption expenditures are continuing to rise, as the average personal savings rate, now at 2.9%, continues to fall.

“While we see that retirement is moving in a good direction [and] markets are up, that doesn’t necessarily mean people are able to navigate their savings and … grow their retirement savings organically,” Ceder said.

‘Financial Grit’

The report argued that fostering “financial grit” is the key to success in planning for retirement. Ceder defined financial grit as a confluence of things—including the willingness to develop and manage a personalized plan, as well as the willingness to sacrifice near-term goals to achieve long-term goals and the utilization of a range of educational resources.

According to the study, competing priorities can significantly erode retirement savings, and without appropriate interventions, many individuals may find themselves unprepared for retirement. Goldman analyzed the total retirement savings of a typical saver who contributes consistently to their plan from age 25 through 65 and measured how different disruptive life events would impact their retirement savings.

For example, for someone with a starting salary of $50,000 and contributing 8% to their plan with a 5% employer match, leaving the workforce for eight years would reduce their retirement savings by 25%. A 10-year delay in starting to save for retirement would reduce retirement savings by 36%, according to the analysis.

Importance of Planning

Ceder emphasized that having a personalized plan for retirement is key to achieving higher savings levels. Workers with a personalized plan are more likely to be ahead of schedule with their savings, more confident in their ability to reach their retirement goals and less likely to delay retirement due to competing priorities, Goldman found.

Ceder added that, during the most recent inflationary environment, people with a plan tended to be more action-oriented when it came to making changes related to their investments, as well as seeking out advice. However, the report found that do-it-yourself investors, women and Generation X employees were the cohorts least likely to use advice services when offered through their 401(k).

“It’s not just people who have higher assets that need these planning resources; it’s the broad scale of retirement savers who need [them],” Ceder said. “We think the 401(k) plan is really the backbone of the industry .”

These services include access to financial wellness programs, digital investment advice or managed accounts, according to the report.

“The challenge is making these services broadly available, [such as] for 403(b) plans,” Ceder said. “A lot of times, when some of these services are offered, they’re offered in very narrow formats … and they are just not broadly marketed.”

Nancy DeRusso, head of financial planning and financial wellness at Goldman Sachs Ayco, said it would be effective if companies mandated that participants create financial plans, such as requiring an employee to talk to an adviser or planner before they make their benefits elections.

DeRusso emphasized the importance of plan sponsors offering access to education and advice, as well as offering benefits that meet the financial needs of different employees, such as those focused on paying down student debt. Effectively communicating about these benefits is also key, DeRusso said.

Investment Strategies

In terms of investing, Gregory Calnon, global co-head of public investing at Goldman Sachs, said defaulting participants into target-date funds early in their careers is an effective strategy for saving over the long-term.

“Having a financial plan coupled with the target-date funds, we think, is really important,” Calnon said. “There’s a period of time in your career, maybe it’s [age] 40, 45 or 50, where you transition away from being purely in target-date funds and … into something that’s more customized.”

Calnon also argued that incorporating alternative investments into defined contribution plans is needed in order to generate more return and narrow the retirement savings gap. However, he said, there is an educational hurdle to this, as participants would need to evaluate new asset classes that were not previously available to them, and there needs to be more product development to provide vehicles for investing in alternatives that offer enough liquidity to be part of a 401(k) plan.