CONSISTENT SAVING, ACCESS TO FINANCIAL ADVICE AND WORKPLACE RETIREMENT PLANS ARE PRIME DRIVERS OF SUCCESSFUL RETIREMENT PREPARATION AT ALL INCOME LEVELS, NEW RESEARCH FROM PUTNAM INVESTMENTS FINDS
Strengthening and Expanding Public and Private Retirement Systems for Working Americans Remain a Critical Challenge, says Putnam CEO Robert Reynolds
BOSTON, June 29, 2011 — In a recent survey of nearly 3,300 working Americans to help determine current levels of retirement preparedness, Putnam Investments identified three key variables that drive successful outcomes. The most powerful factor, regardless of income level, is a pattern of disciplined, long-term savings and investing. Households with access to a workplace savings plan and those that work with financial advisors were also significantly better positioned for retirement than their counterparts.
The Putnam Lifetime Income ScoreSM research is believed to be one of the most thorough and comprehensive studies conducted to determine retirement preparedness of Americans. The research looks at behavioral tendencies, mortality factors and current retirement and non-retirement assets, such as investment securities, annuities and cash value life insurance, to estimate the level of income that U.S. households are currently on track to replace in retirement. Overall, the study found that American households are on track to replace 64% of their current income in retirement.
"While promising in some areas, these findings tell us — clearly — that U.S. households still need to save more to reach sufficient income for successful retirement. It is critically important to strengthen public and private retirement systems and broaden access to workplace savings for all working Americans," said Putnam Investments President and CEO Robert L. Reynolds.
"The data also demonstrates, unmistakably, the valuable role that financial advice plays in helping individuals prepare for retirement, as well as the behavioral changes needed for success. Overall, we hope this body of research will encourage individuals, their advisors, employers and policy makers to take the steps needed to achieve greater retirement security for this nation," noted Reynolds.
The research also provided a window into the overall importance of Social Security to the country's income replacement trajectory:
"The American dream of a dignified and secure retirement is at risk for millions of people. The Putnam Lifetime Income Score analysis suggests that if we want to avoid a major increase in elderly poverty over the next generation, we have to act now to make Social Security solvent and to raise personal retirement savings across the board. Enacting auto-IRA payroll deduction to help make workplace savings programs available to all working Americans and maintaining tax incentives to encourage strong participation by individuals in 401(k) plans and IRAs more broadly are significant pieces of solving the retirement puzzle as well," said Reynolds.
Key findings of the study include:
About the Survey
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About Putnam Investments
The Putnam Lifetime Income ScoreSM represents an estimate of the percentage of current income that an individual might need to replace from savings in order to fund retirement expenses. For example, consider an individual, 45 years old, with an income of $100,000 per year. A Lifetime Income Score of 64% indicates that the individual is on track to be able to generate $64,000 in retirement income (in today's dollars), i.e., 64% of current income. This income estimate is based on the individual's amount of current savings as well as future contributions to savings (as provided by participants in the survey) and includes investments in 401(k) plans, IRAs, taxable accounts, variable annuities, cash value of life insurance, and income from defined benefit pension plans. It also includes future wage growth from present age (e.g., 45) to the retirement age of 65 (1% greater than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)) as well an estimate for future Social Security benefits.
The Lifetime Income Score estimate is derived from the present value discounting of the future cash flows associated with an individual's retirement savings and expenses. It incorporates the uncertainty around investment returns (consistent with historical return volatility) as well as the mortality uncertainty that creates a retirement horizon of indeterminate length. Specifically, the Lifetime Income Score procedure begins with the selection of a present value discount rate based on the individual's current retirement asset allocation (stocks, bonds, and cash). A rate is determined from historical returns such that 90% of the empirical observations of the returns associated with the asset allocation are greater than the selected discount rate. This rate is then used for all discounting of the survival probability-weighted cash flows to derive a present value of a retirement plan. Alternative spending levels in retirement are examined in conjunction with this discounting process until the present value of cash flows is exactly zero. The spending level that generates a zero retirement plan present value is the income estimate selected as the basis for the Lifetime Income Score. In other words, it is an income level that is consistent with a 90% confidence in funding retirement. It is viewed as a "sustainable" spending level and one that is an appropriate benchmark for retirement planning.
The survey is not a prediction, and results may be higher or lower based on actual market returns.