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Retirement Income Projection number: Motivator?

| April 14, 2024

This question came up during a recent Retirement Income for 401(k) Plans training. Does the Retirement Income Projection number on an employee's 401k statement motivate them to retire? What followed was an intense debate and I thought I'd share some observations from 34 years in the financial services industry.

As noted in yesterday's post, the Retirement Income Projection number needs to be somewhat accurate. It will never be 100% accurate as the underlying analytical system is relying on external data (ie, projected employee Social Security payments) and assumptions (ie, potential increases in salary). The analytical system also cannot possibly know if an employee is going to receive an inheritance which would impact a possible retirement income number.

Having said that, as I showed yesterday, some retirement income analytical systems have produced dubious projections. The proposed Retirement Income Projection number could be less of a motivator if the employee does not have some confidence in it. It might actually just be ignored by the employee. I suppose in the worst case, it might be lead to self-defeating behavior of "I will never be able to retire".

The Retirement Income Projection number first came out in 2013 in the 401k space. It was part of the "Lifetime Income Disclosures Proposal". While I do see the helpfulness in this number in encouraging employees to save more, I can also see the frustration for employees who are not being paid a living wage. There was a time in my career where I did not have two dimes to rub together based on the salary I was earning.

And yes, California recently enacted a $20/ hour wage for fast-food workers. How long before that figure seeps into other industries? And is $20/ hour going to allow an employee to retire with dignity? It depends to some extent on where the employee wants to retire, when they want to retire, what they want to do in retirement, and how long retirement may last.

The Retirement Income Projection number could be a motivator but it is also presupposing that employees know how much they need to retire. 2023 data from the US Bureau of Labor Statistics shows a decline in the amount of time Americans spend daily on financial planning. In the 2000s, 4% or more Americans worked on financial planning on an average day. That fell to 3% or more in the 2010s and early 2020s.

This trend continues in the percent of Americans using professional financial services or banking on an average day. That percentage has steadily declined from 4.2% in 2003 to 1.6% in 2022. The same set of Bureau statistics shows that Americans spent an average of 1.8 minutes per day on financial planning in 2023. The old adage about Americans spending more time planning vacation than retirement may indeed be true.

And finally, Americans are working longer. While we might chuckle at a 77-year-old and an 81-year-old both vying for the nation's top job, among Americans 65 and older, 19% are still working, a twofold increase from the late 1980s (Pew Research Center, 2023 study). A 2023 Gallup study shows the average retirement age is 62, up from 59 in the early 2000's. I expect the average retirement age will keep increasing.

The fact that Americans are living longer also plays into whether an employee wants to retire. Americans are living longer today than they were in the 1980s. Advances in medicine allow for longer life expectancies. Technology has also made it easier to do some jobs from the comfort of home. I must admit to a good laugh at the thought that I could be a call center rep in my late 70s, working from home. I started as a call center rep in the early 90's. Talk about full circle!

One thing that I don't think the Retirement Income Projection number counts on is how intrinsic work is to the American identity. While we could look at the Protestant work ethic that equates work with holiness, I find the best example in a dear late family friend, Ron. Ron was still working at 76 in a financial office. When I asked him why he didn't just retire, he explained that work gave him a sense of purpose. Work got him out of bed. He suspected he would die quickly if he could not work and was forced to sit at home watching TV.

The premise behind the Retirement Income Projection is sound and logical. But what drives a person to retire is increasingly complex. It goes beyond a mere number on a 401k statement. The number may be suspect. The number might assume a particular life expectancy that is not accurate. And the number cannot determine the importance of work in someone's life.

To the question of, "Will the Retirement Income Projection number encourage workers to retire?", the answer is likely a guaranteed "Maybe".