Data and Research October 17, 2019

Envisioning Retirement Can Lead to Better Savings Behavior

Those with a clear picture of their retirement are more than twice as likely to save 15% or more in their workplace retirement plan, a survey found.

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People who take the time to envision their ideal retirement save a higher rates than those who don’t go through this exercise, according to new research from Lincoln Financial Group.

Retirement plan participants who have envisioned their ideal retirement think they need to save a median of 20% of their income. As a result, those who have a picture of what retirement holds for them are more than twice as likely to save 15% or more to their workplace retirement plan compared to those who have not given it any thought.

“Planning for retirement is more than just a number,” says Jamie Ohl, executive vice president, president of retirement plan services at Lincoln Financial Group. “When savers take the time to really think through what retirement will hold—like volunteering, traveling the world or even working part time—they are better able to take steps today to make the tomorrow they imagine a reality.”

Asked what they thought an ideal retirement would include, the most popular themes were traveling (35%), not worrying about money (30%) and living comfortably (16%). This was followed by being debt-free (12%), relaxing (11%), relocating or downsizing their home (10%), enjoying entertainment or hobbies (9%), spending time with family and friends (9%) and working part time (8%).

“We heard directly from participants in our study, who said they wanted to ‘live comfortably, not extravagantly’ and ‘don’t want to fee like we can’t do fun things because money is tight,’” Ohl says. “This is powerful—and we are doing everything we can to help participants understand not just how much they need to save, but how to save more, so they can achieve those goals.”

Lincoln Financial says besides envisioning an ideal retirement, it is also important for people to estimate the cost of that ideal retirement. However, among those within 10 years of retirement, only half have estimated the basic costs they will face in retirement, and only 38% have calculated what their ideal retirement would cost.

Retirement plan sponsors can help employees plan for their unique vision of retirement. Offering retirement planning calculators allows participants to understand what their finances and savings might look like years down the line. If participants run a variety of potential scenarios, they can start to formulate a picture of their ideal retirement—whether that means retiring outright, embracing part-time work or even launching their own business.

Sponsors can also offer financial wellness programs, automatically enroll participants or escalate their contributions into the plan. And employers may also consider setting up phased retirement programs.
Data and Research October 17, 2019

Research Finds No Impact of Auto Enrollment on Debt

A study found “no statistically significant evidence that automatic enrollment increases” consumer debt, but the impact on auto and home debt was more ambiguous.

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The idea has been presented that it makes sense to pay off debt before saving for retirement—especially if the interest paid on debt is greater than the interest earned on retirement savings.

Employers recognize the issue with debt and many have included education about paying off debt in financial wellness programs. And, some employers encourage employees with student loan debt to pay it off and save for retirement at the same time by offering student loan repayment programs. There are numerous ways employers can do this.

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At least one survey has found that “among households under the age of 55, each dollar contributed to a 401(k) plan or similar tax-advantaged retirement account is offset by approximately 40 cents in pre-retirement taxable withdrawals.” The study calls into question whether automatic enrollment in retirement plans is really helping employees with their overall financial security.

However, recent research indicates that forcing employees to save—auto enrollment—does not increase debt levels for retirement plan participants. The study published by the National Bureau for Economic Research (NBER) found “no statistically significant evidence that automatic enrollment increases” consumer debt.

The research looked into the experience of civilian Army employees enrolled in the Federal Thrift Savings Plan (TSP). Prior to August 2010, they had to opt into contributing to the TSP. Starting on August 1, 2010, newly hired employees were automatically enrolled in the TSP at a default contribution rate of 3% of their income unless they opted out.

The researchers also found credit scores indicate automatic enrollment does not increase high-interest debt and financial distress.

In a regression analysis, the researchers also did not find a statistically significant effect of automatic enrollment at 43 to 48 months of tenure on auto debt or first mortgage debt.

This may be the case even if a participant takes a loan from the TSP to fund a home or auto purchase. The researchers explain, “An automatically enrolled household might purchase a more valuable durable because it feels wealthier due to its increased TSP balances. The larger mortgage balance does not represent any contemporaneous net worth reduction in this transaction, since each dollar of borrowed TSP balances has been transformed into a dollar of home equity, and each additional dollar of mortgage debt is offset by an additional dollar of housing asset. Conversely, an automatically enrolled household might extract equity or spend down fewer financial assets to acquire a durable because it has fewer financial assets available.” They say the latter transaction still has no effect on net worth.

However, the researchers concede that they cannot be absolutely sure of the financial impact of auto enrollment on auto and home debt because they did not have non-TSP financial data for the research subjects. There could be implications for future net worth.

The study report, “Borrowing to Save? The Impact of Automatic Enrollment on Debt,” may be downloaded from here.

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