The Golden Years – Not!
By: Norman Sorensen
Relaxation, hobbies, financial freedom – sound like a retirement dream? It’s not to participants in the third annual Principal Financial Global Well-Being Study. For them, retirement looks more like a problem.
The 2004 survey, now in its third year, consisted of more than 6,000 working adults in 12 countries including Brazil, Mexico, Chile, the United States, Great Britain, Germany, France, Italy, India, Japan, China, and Hong Kong SAR. This year’s results were the most troublesome since the survey was started in 2002. In that year, people were concerned about the slump in financial markets and the fall-out from September 11. In 2003, they were worried about pension reform and continued market malaise. In 2004, despite the recovery of financial markets worldwide, responses indicate genuine worries about future financial prospects.
This year's findings include:
- Most participants are extremely concerned about their financial future.
- Few are confident their retirement will match their parents’ in terms of affluence.
- Many lack confidence that they will be able to afford basic expenses in retirement.
- There is a troubling lack of financial preparation for retirement.
- Most participants have little faith in their governments’ ability to help them maintain their standard of living into retirement.
For these people, the three legs of the retirement stool – the individual, the employer, and the government – are faltering.
Significant numbers believe their retirement will be less prosperous than their current standard of living. At least four in 10 in Italy, Germany, Brazil, the United States, Japan, and France say their standard of living will be worse than it is now.
Although most workers feel that they are doing a good job of preparing for retirement, the disconnect between this belief and actual retirement planning activities is alarming. For example, almost one-half of participants completely or somewhat agree that they have not yet planned for their retirement. Brazilians are most likely to say they have not yet planned for retirement, with more than one-half of those from Chile, Italy, and France saying the same. Just one-fourth have tried to determine how much they need to save for retirement.
There’s more bad news.
Participants in some countries have failed to properly estimate the length of time their retirement savings need to last. Most plan to retire at about the normal retirement age for their country and spend a median of 10 to 20 years in retirement. This brings participants of many countries, on average, within a few years of life expectancy at retirement.
However, participants in China, Mexico, and Japan have significantly underestimated their life expectancy at retirement (by 12 years, 11 years, and seven years, respectively). And that is only if workers live an average lifespan. Significant numbers are expected to exceed that timeframe.
No Advice At All
Expert retirement planning advice would help this situation, but many say they receive no advice at all. Others receive advice primarily through less than reliable sources such as friends, relatives, television, or radio.
Few participants trust their government to help them maintain a good standard of living in retirement or to help them save for retirement. This indicates the massive failure of countries with government-sponsored Defined Benefit systems to implement solutions to the overwhelming age wave problems they face over the coming years.
Meanwhile, participants in countries with Defined Contribution systems may feel that they can’t expect financial help from the government and that the burden for retirement is entirely on their shoulders. Although these governments have enacted systems that will eventually provide adequate retirement security for many, individuals still lack the information and tools that will allow them to correctly plan for retirement and manage their money once they do retire. Governments with DC systems have only implemented part of the solution until they have provided these tools.
Additionally, many workers currently feel they cannot rely on promised employer benefits as currently structured, although most continue to need the structure and support of an employer-based pension.
There are several key alternatives that can, and should, be implemented to stave off the “grey dawn” of distressed retirement as former U.S. Commerce Secretary Pete Peterson puts it. These include:
- For countries with government-sponsored DB systems, extend the full benefits retirement age, reduce the availability of early retirement benefits, and support voluntary contributions with tax incentives and catch-up provisions.
- To help individuals prepare for retirement, develop annuity streams so that retirees do not out-spend lump-sum payouts, develop investment alternatives based on individual tolerances for risk and stage of life (for example, lifecycle funds), and allow employers to provide retirement education and advice in the workplace.
- To encourage and strengthen employerbased pensions, allow employers to add money to their employees’ pension funds as an additional benefit.
Norman Sorensen is president of Principal International
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