Investing: U.S. retirement confidence improves, but preparation lags

Denial is not just a river in Africa. It also is a powerful driver of how Americans think about their prospects for a secure retirement.

A new survey of retirement confidence published last week confirms that many workers lack realistic plans for making ends meet in retirement. It also suggests there is a disconnect between Americans' confidence about retirement and their actual preparations to ensure a comfortable one.

The Retirement Confidence Survey published by the Employee Benefit Research Institute (EBRI) provides a long view of how we are doing as a country in preparing for retirement, and this year's survey does contain some encouraging news.

EBRI found that the percentage of workers who are confident about having enough money for a comfortable retirement has continued to recover from the record lows following the Great Recession. Twenty-one percent are very confident this year, compared with 13 percent in 2013. Those who are somewhat confident rose to 42 percent, up from 38 percent in 2013.

So that means 63 percent of those surveyed have some degree of confidence. But here is the problem — many people are just guessing. Only 48 percent of workers say that they or their spouse have ever tried to calculate how much they will have to save to live comfortably in retirement. That percentage has not budged significantly since the recession's onset in 2008. Just 19 percent of those over age 55 have a financial plan for retirement.

Moreover, some of the plans people are making may not be realistic. For example, 65 percent of workers say they think they could get along with less than half of their pre-retirement income — yet most retirement planning experts suggest a replacement rate of 70 to 80 percent. "People do a poor job of understanding how much they will need for a retirement that could last a long time — and many don't understand the basics of what their expenses will be in retirement," said Matthew Greenwald, president of Greenwald & Associates, which conducts the survey for EBRI.

Also troubling is the reliance workers are placing on their ability to generate income from work at the end of their careers and in retirement. That may reflect the increasing aspiration to reinvent retirement, or simply never retire at all.

The survey findings also suggest that workers are not making smart decisions about timing their claims for Social Security. Seventy-three percent say they are very or somewhat confident in their ability to decide when to claim Social Security — yet Social Security Administration data consistently show that roughly 40 percent of workers file for benefits at age 62, the earliest age of eligibility, rather than waiting at least until their full retirement age (currently 66).

Although there is certainly no single correct time to claim benefits, it is to most people's advantage to wait at least until the full retirement age, since the delayed retirement credit delivers roughly 8 percent higher benefits annually for each 12 months that one waits. The delayed credit is especially helpful to married couples if the higher-earning spouse delays his or her claim.

EBRI also found that the percentage of workers who have little or no retirement saving remains stubbornly high. Fifty-four percent have saved less than $25,000 — and within that group, 26 percent have less than $1,000.

The saving levels are better for older workers, who have had more time to save. Among workers aged 55 or older, 30 percent have saved more than $250,000, and 15 percent have between $100,000 and $249,000. But even within this older group, 33 percent have saved less than $25,000. That means many retirees will be entirely reliant on Social Security, which replaces 39 percent of pre-retirement income, on average. It also means that a significant portion of retirees will have no cushion to meet emergency expenses, aside from the equity in their home.

What accounts for the disparity between retirement confidence and actual preparation? Over time, confidence levels have moved in tandem with macroeconomic trends, said Greenwald, rather than individual household balance sheets. Confidence levels peaked in 2000 before the tech bubble burst, and stayed relatively high until the recession — and they fell after that. The recovering economy is making people feel better, but that may not be justified, he said.